Original Issue Discount - OID
Barron's Finance & Investment Dictionary:
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Original Issue Discount - OID
discount from par value at the time a bond or other debt instrument, such as a strip, is issued.
(Although the par value of bonds is normally $1,000, $100 is used when traders quote prices.) A bond may be issued at $50 ($500) per bond instead of $100 ($1000), for example. The bond will mature at $100 (1,000), however, so that an investor has a built-in gain if the bond is held until maturity. The most extreme version of an original issue discount is a zero-coupon bond, which is originally sold at far below par value and pays no interest until it matures. The revenue reconciliation act of 1993 extended OID rules to include stripped preferred stock.
The tax treatment of original issue discount bonds is complex.
The Internal Revenue Service assumes a certain rate of appreciation of the bond every year until maturity. No capital gain or loss will be incurred if the bond is sold for that estimated amount. But if the bond is sold for more than the assumed amount, a capital gains tax or a tax at the Ordinary Income rate is due.
savings bonds are exempt from OID rules.
(Although the par value of bonds is normally $1,000, $100 is used when traders quote prices.) A bond may be issued at $50 ($500) per bond instead of $100 ($1000), for example. The bond will mature at $100 (1,000), however, so that an investor has a built-in gain if the bond is held until maturity. The most extreme version of an original issue discount is a zero-coupon bond, which is originally sold at far below par value and pays no interest until it matures. The revenue reconciliation act of 1993 extended OID rules to include stripped preferred stock.
The tax treatment of original issue discount bonds is complex.
The Internal Revenue Service assumes a certain rate of appreciation of the bond every year until maturity. No capital gain or loss will be incurred if the bond is sold for that estimated amount. But if the bond is sold for more than the assumed amount, a capital gains tax or a tax at the Ordinary Income rate is due.
savings bonds are exempt from OID rules.
| Original Cost, Organized Securities Exchange | |
| Original Maturity, Originator |
Investopedia Financial Dictionary:
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Original Issue Discount - OID
The discount from par value at the time that a bond or other debt instrument is issued. It is the difference between the stated redemption price at maturity and the issue price.
Investopedia Says:
An original issue discount bond is a bond issued at a price below par. The most extreme example of an OID is a zero-coupon bond. OID is considered to be a form of interest, so tax issues can get a bit complicated.
Related Links:
Investing in bonds - What are they, and do they belong in your portfolio? Bond Basics Tutorial
Learn the basic rules that govern how bond prices are determined. How Bond Market Pricing Works
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Barron's Finance & Investment Dictionary
Dictionary of Finance and Investment Terms. Copyright © 2010 by Barron's Educational Series, Inc. All rights reserved.
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