Understanding Original Issue Discount (OID): A Comprehensive Guide for Investors and Borrowers

By Natalie BrooksLast Updated September 17, 2025

Photo by Ivan Shilov on Unsplash

What Is Original Issue Discount (OID) in Finance?

Original Issue Discount (OID) is a fundamental concept in debt financing and fixed-income investing. It refers to the difference between a debt instrument’s stated redemption price at maturity (typically the face or par value) and its original issue price, when the debt is sold for less than its redemption value. In essence, OID is a form of interest that accrues over the life of the debt-even if it is not paid out periodically-and must be recognized for both accounting and tax purposes [1] , [2] , [6] .

How Does OID Work? Detailed Explanation

When an issuer (such as a corporation or government) wants to raise capital by selling bonds or other debt securities, it sometimes sells them for less than the amount that will be paid back at maturity. For example, a $1,000 face value bond might be sold for $950. The $50 difference is the OID, which functions as additional interest income for the investor, over and above any regular coupon payments [1] , [2] .

OID is especially common in the following situations:

When bonds have a coupon rate lower than prevailing market rates
With zero-coupon bonds, which pay no periodic interest and are sold at deep discounts
When issuers face higher perceived credit risk and must offer more attractive terms to investors

The OID is amortized (spread out) over the life of the bond, gradually increasing the recorded book value of the liability for issuers and the recognized income for investors [1] , [2] , [6] .

Why Are OID Securities Issued?

There are several strategic reasons why issuers opt for OID:

Market Competitiveness: If an issuer’s offered coupon rate is lower than market rates, selling at a discount compensates investors with a higher effective yield.
Investor Incentive: OID can make a security more attractive, drawing in investors who might otherwise seek higher-yield or lower-risk alternatives.
Cash Flow Considerations: Issuers might prefer to minimize ongoing interest payments by issuing zero-coupon or low-coupon OID bonds, only paying the full amount at maturity [1] , [4] .

OID in Practice: Examples and Case Studies

Consider a corporation that needs to raise $100,000. To attract investors, it issues bonds with a $100,000 face value for $98,000. The OID is $2,000. Even if the bond pays a lower coupon, the investor’s overall yield increases because they only paid $98,000 but will receive $100,000 at maturity, plus any coupons [1] .

Another example is a zero-coupon bond : Suppose a municipality issues a zero-coupon bond with a $10,000 face value, selling it for $7,500. The investor receives no periodic interest, but collects the full $10,000 at maturity. The $2,500 difference accrues as OID and is treated as interest income for tax purposes [6] .

How to Calculate OID

OID is calculated as the difference between the bond’s redemption price at maturity and its original issue price:

OID = Redemption Price (Par Value) – Issue Price

For example, if a bond’s par value is $1,000 and it is issued at $950, then OID = $1,000 – $950 = $50.

The OID must be amortized over the bond’s life, with a portion recognized as interest income each year, according to the constant yield method prescribed by the IRS [6] .

Accounting and Tax Implications of OID

OID has both accounting and tax significance:

For Issuers: The bond is recorded on the balance sheet at its issue price. The OID is amortized as an interest expense over the life of the bond, increasing the liability on the balance sheet until it reaches par value at maturity [2] , [4] .
For Investors: Investors must recognize OID as taxable interest income annually, even if no cash interest is received until the bond matures. The IRS provides rules for calculating and reporting OID income [6] .

This can be especially important for tax planning, as OID on many types of bonds (including zero-coupon bonds and Treasury securities) is subject to annual taxation under U.S. law, even though the investor receives the payout only at maturity.

Practical Guidance: How to Access and Invest in OID Securities

If you are considering investing in OID securities or using them for corporate financing, here are actionable steps to follow:

Understand the Product: Request and review the bond’s offering documents or prospectus. Look for the issue price, redemption price, coupon rate, and calculation of OID.
Consult a Tax Professional: Since OID has unique tax treatment, speak with a tax advisor before investing-especially for large or complex transactions.
Evaluate Yield: Use yield-to-maturity calculators or consult reputable financial analysis resources to compare the effective return of OID bonds with traditional coupon bonds [1] .
Accessing OID Investments: OID securities, including zero-coupon bonds, are available through major brokerages, investment banks, and direct offerings from corporations or government entities. To find offerings, search major brokerage platforms or visit the official websites of large financial institutions.
For Issuers: If you are a corporate treasury or finance professional, discuss with your investment bank or financial advisor whether OID bonds fit your funding strategy. Evaluate the impact on your company’s debt service, credit rating, and investor appeal.

If you are unable to find OID bond offerings through your brokerage, consider contacting the customer service department for assistance or searching for “original issue discount bonds” in your provider’s fixed-income product listings.

Potential Challenges and Solutions

There are several potential challenges that investors and issuers may face with OID bonds:

Tax Complexity: OID income is often taxed annually, even though cash is only received at maturity. This can surprise investors who are not prepared for the additional tax reporting requirements. To address this, work with a tax advisor and refer to IRS Publication 1212 for guidance [6] .
Market Liquidity: Some OID bonds, especially those issued by smaller companies, can be less liquid than traditional bonds. Investors should research trading volumes and secondary market activity before committing funds.
Issuer Credit Risk: Because OID bonds are sometimes issued by entities with weaker credit profiles, investors must thoroughly assess the issuer’s ability to repay at maturity. Use credit ratings, financial statements, and independent analysis as part of your due diligence [1] .

Alternative Approaches and Related Concepts

OID is not the only way issuers can make debt securities attractive. Alternatives include:

Higher Coupon Bonds: Instead of issuing at a discount, the issuer may simply offer a higher coupon rate.
Convertible Bonds: These give investors the option to convert bonds into equity, potentially increasing upside.
Callable Bonds: Bonds that the issuer can redeem before maturity, often with higher coupons or discounts to compensate for call risk.

Zero-coupon bonds, stripped bonds, and Treasury bills are all examples of securities typically issued at an OID [6] .

Summary and Key Takeaways

Original Issue Discount (OID) plays a critical role in both corporate finance and investing. It affects yield, tax liabilities, and risk profiles for both issuers and investors. Understanding OID allows for better investment decisions and more effective debt financing strategies. For the latest rules and guidance, investors and issuers should always consult current IRS publications and seek advice from qualified professionals to ensure compliance and optimize outcomes.