original issue discount

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Original Issue Discount

The difference between a bond's face value and the amount for which it is sold by the issuer. Many bonds, especially those with low interest rates, are issued at a price less than par in order to entice buyers. Generally, the lower the interest rate, the greater the original issue discount, with zero-coupon bonds having the largest. Short of default, the original issue discount is a guaranteed profit for a bondholder, as bonds must be redeemed at face value. It is considered a form of interest and may be taxed as such.

Original issue discount.

A bond or other debt security that is issued at less than par but can be redeemed for full par value at maturity is an original issue discount security.

The appeal, from an investor's perspective, is being able to invest less up front while anticipating full repayment later on.

Issuers like these securities as well because they don't have to pay periodic interest. Instead, the interest accrues during the term of the bond so that the total interest when combined with the principal equals the full par value at maturity.

Zero-coupon bonds are a popular type of original issue discount security. The drawback, from the investor's perspective is that the imputed interest that accumulates is taxable each year even though that interest has not been paid.

The exceptions are interest on municipal zero-coupons, which are tax exempt, or on zeros held in a tax-deferred or tax-exempt accounts.

original issue discount

See imputed interest.

References in periodicals archive ?
This discount is known as original issue discount (OID) and is taxable as a form of additional interest.
Courts have consistently held that unamortized original issue discount is unmatured interest and therefore is not an allowable claim.
The accrued original issue discount of the Debentures payable on the redemption date is $23,403.
Accrual-method taxpayers who sell property in exchange for an installment obligation must treat as part of the amount realized the gross value of all payments to be received on the obligation (less stated and unstated interest, as well as original issue discount, according to regulations section 15a.
After giving effect to original issue discount, NextWave received net proceeds of $14,250,000 to be used in connection with ordinary course business operations.
Lowe's will redeem for cash all senior convertible notes issued in October 2001 outstanding on June 30, 2008 at a price equal to the sum of the issuance price, plus accrued original issue discount on the redemption date ($875.
Such costs must now be amortized in the same manner as original issue discount (OID).
Yield to maturity, calculated under the original issue discount (OLD) rules, equals or exceeds the applicable federal rate (AFR) plus 5%.
Since July, 2008, GCC has been reporting for their clients the new WHFIT required data fields, Original Issue Discount (OID) and Market Discount Fraction (MDF).
0% of the average market price of the Securities, as applicable, for the five trading days ended May 9, 2008, in addition to the continued accrual of the original issue discount.
Different book and tax treatment of original issue discount (OID), market discount, acquisition discount, de minimis OID, qualified stated interest, amortizable bond premium, bond issuance premium or debt issuance costs;
Withholding reduces a loan's issue price, creating an original issue discount (OID).

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