Please explain why I am able to instantiate the “Application” interface in Excel VSTO

The compiler allows you to instantiate interfaces if they’re decorated with a CoClass attribute identifying the concrete class that implements them (as well as a ComImport and a Guid). When you instantiate the interface, you would actually be instantiating this concrete class behind-the-scenes.

This “feature” is intended to be used as plumbing for COM imported types. Notice how the Outlook Application interface is backed by a concrete class named ApplicationClass:

[GuidAttribute("00063001-0000-0000-C000-000000000046")]
[CoClassAttribute(typeof(ApplicationClass))]
public interface Application : _Application, ApplicationEvents_11_Event

In most circumstances, you should not go applying these attributes to your own interfaces. However, for the sake of demonstration, we can show that the compiler will allow you to take advantage of this possibility for instantiating interfaces in your code. Consider the following simple example (the GUID is random):

[ComImport]
[Guid("175EB158-B655-11E1-B477-02566188709B")]
[CoClass(typeof(Foo))]
interface IFoo
{
    string Bar();
}

class Foo : IFoo
{
    public string Bar()
    {
        return "Hello world"; 
    }
}

Using the above declarations, you can create an instance of your own IFoo interface:

IFoo a = new IFoo();
Console.WriteLine(a.Bar());
// Output: "Hello world"

Edit: Although jonnyGold correctly notes that the Excel Application instance is not decorated with CoClass on MSDN, this appears to be an MSDN omission. The decompiled signature from the Microsoft.Office.Interop.Excel assembly is:

[CoClass(typeof(ApplicationClass)), Guid("000208D5-0000-0000-C000-000000000046")]
[ComImport]
public interface Application : _Application, AppEvents_Event