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 ?
An irrevocable election may be made, on an obligation-by-obligation basis, to determine the amount of original issue discount by using daily compounding at a constant interest rate.
OID bonds are to appear in IRS Publication 1212 after bond issuers -- primarily corporations -- supply IRS with information by filing Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments.
21) Prior to the Chateaugay decision, no court had ruled whether original issue discount could occur for claims-valuation purposes in a debt-for-debt exchange offer in which the new debt has a face value in excess of the market value of the surrendered instrument.
Original issue discount arises when a debt instrument is issued for a price less than its stated principal amount.
Original issue discount on certificates of deposit with a term of one year or less does not have to be reported until the year of disposition.
Simultaneously with the offering of New Debentures and Warrants, pursuant to Exchange Agreements, the holders of the Company's Original Issue Discount Debentures issued on July 17, 2017 and due October 17, 2017 will exchange $4,136,862 principal amount of such debentures for $6,412,136 of new debentures on the same terms as, and pari passu with, the New Debentures (the "Exchange Debentures" and, together with the New Debentures, the "Debentures") and Warrants.
In response to the widespread use of high-yield original issue discount (OID) and paid-in-kind (PIK) debt in acquisitions, Congress added Sec.
The regulations also apply to guaranteed payments to a partner for the use of capital and to loans that have unstated or foregone interest or original issue discount.
The Tax Court decided the covenant not to compete was valid and amortizable over its three-year life; however, the expenses associated with the acquisition were nondeductible and the warrants had a zero fair market value, creating no original issue discount (OID).
The loan will be made at par without original issue discount.
7) His basis is generally his cost of acquisition adjusted by (i) adding any original issue discount and market discount included in income as it accrued, (8) or (ii) subtracting the amount of premium deductible or applied to reduce interest payments over the period he held the bond if he elected to amortize the premium (see Q 1110, Q 1116, Q 1120).