Legal Definitions - OID

Definition: OID stands for Original Issue Discount. It refers to the difference between the face value of a bond or other debt instrument and the price at which it is sold initially. This discount is treated as interest income for tax purposes and is spread out over the life of the bond.

Example: Let's say a company issues a bond with a face value of $1,000 but sells it for $900. The OID in this case would be $100 ($1,000 - $900). This $100 discount is considered interest income and is spread out over the life of the bond.

Explanation: The example illustrates how OID works in practice. When a bond is sold at a discount, the difference between the face value and the sale price is treated as interest income for tax purposes. This interest income is spread out over the life of the bond, which means that the bondholder will have to pay taxes on it each year until the bond matures.