amount that the original issue price of a bond, Collateralized Bond Obligation or other debt instrument is below par value or face value. These bonds require special tax treatment from the Internal Revenue Service. The Internal Revenue Servi ce treats the increase in price from the original issue price to par at maturity as interest subject to income tax. Even though no interest is received, taxes are due on the annual accretion of bond interest. At the extreme, a zero-coupon bond pays no interest at all until maturity.
discount from par value at the time a bond is issued. The most extreme version of an original issue discount is a zero coupon bond, which is originally sold far below par value and pays no interest until it matures. The tax treatment of original issue discount bonds is complex. Generally, OID must be amortized over the life of the debt obligation, which in turn increases the basis of the bond.
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 convertible security, 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.
savings bonds are exempt from OID rules.
