What is original issue discount?
Original issue discount (OID) is the difference between the face, or par, value of a debt instrument and the lower price at which it is actually issued. A loan struck at 99 against a par of 100 carries one point of OID: lenders fund 99 cents on the dollar but are owed the full dollar at maturity.
That gap is a form of return. The borrower receives less cash than the face amount it must eventually repay, and the discount accretes back to par over the life of the instrument, lifting the lender's effective yield above the stated coupon.
OID is a standard lever in leveraged finance. When a deal needs an extra increment of yield to clear the market without raising the headline spread, the arranger issues the loan at a discount. It is also one of the outcomes of price flex: if demand is soft during syndication, deepening the OID is a common way to attract buyers.
How original issue discount actually works
OID is set at issuance and earned over the instrument's life.
- Price below par. The instrument is issued at a price under 100 — say 98 or 99 — so lenders fund less than the face amount.
- Owe par. The borrower remains obligated to repay the full face value at maturity, regardless of the discounted issue price.
- Accrete. The discount is recognized over the life of the instrument, adding to the lender's return on top of the coupon.
- Boost effective yield. Because lenders paid less but collect par plus coupon, the all-in yield exceeds the stated rate.