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 ?
Alternatively, an investor may elect to use the constant yield method, similar to the original issue discount rules, with respect to particular bonds and notes.
If an issuer repurchases its own debt in a debt-for-debt exchange and neither the old debt instrument nor the new debt instrument is publicly traded, as defined in the Final Regulations, then the redemption premium is not deductible in the year of the repurchase (exchange), but instead must be amortized over the term of the newly issued instrument in the same manner as if it were original issue discount. If either the old debt or the new debt is considered publicly traded, however, then Treas.
The taxpayer making the election must include as income an amount equal to the sum of the daily portions of original issue discount (in the case of T-bills, daily portions of acquisition discount) for each day that he held the obligation in the tax year.
Question--What is an "original issue discount" bond?
Courts have consistently held that unamortized original issue discount is unmatured interest and therefore is not an allowable claim.(19) If Company A in the above example were to declare bankruptcy immediately after issuance of the securities, [sections] 502(b) would only permit holders of the securities a claim of $700 in bankruptcy.
Lower Court Judge Disallowed Original issue Discount Judge Lifland pointed out that under Section 502 (b) (2) of the Bankruptcy Code, the portion of an unsecured creditor's claim which represents "unmatured interest" must be disallowed.
The loans under the repriced TLB-1 facility were issued at par and not subject to an Original Issue Discount (OID).
Simultaneously with the closing of the Arysta acquisition, Platform amended its credit agreement and borrowed an additional USD 500m (less original issue discount of 1%) through an incremental term loan denominated in US dollars, EUR 83m (less original issue discount of 2%) through an increase to its existing term loan facility denominated in euros, and USD 150m through an increase to its existing revolving credit facilities, which borrowings were used to fund a portion of the cash consideration for the Arysta acquisition.
An original issue debt instrument may be issued in one of three ways: below par with original issue discount (00) (Secs.
Also, any increase in the principal amount during the tax year due to inflation (positive inflation adjustment) is treated as original issue discount and is included in income, while any decrease in the principal amount due to deflation (negative inflation adjustmen0 first reduces the qualified stated interest, and any excess can create a loss.
For tax purposes, they are considered original issue discount bonds, and the original issue discount is included in ordinary income depending on when issued, as explained in Q 7724 and Q 7737 to Q 7740.
However, in the case of a tax-exempt bond stripped after June 10, 1987, a portion of the original issue discount may be treated as if it comes from a taxable obligation.

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