OID is the discrepancy between the initial selling price of a bond and its face value, indicating that the bond is sold below its true worth.
The original-issue discount (OID) is the discrepancy between the face value and the initial selling price of a bond. It is typically expressed as a percentage of the face value and signifies the interest that the bondholder will earn throughout the bond’s lifespan. For instance, if a company sells a bond with a face value of $1,000 for $900, the original-issue discount would be $100 or 10% of the face value. This implies that the bondholder will earn interest on the $1,000 face value, despite only paying $900 to acquire it. Similarly, if a bond with a face value of $10,000 is sold for $9,000, the original-issue discount would be $1,000 or 10% of the face value. These examples demonstrate how the original-issue discount is computed and how it represents the disparity between the face value and the initial selling price of a bond.
OID refers to the difference between the face value of a debt instrument (such as a bond) and its issue price when it is initially sold. It represents the interest that accrues on the debt instrument over time and is payable at maturity.
OID is calculated by subtracting the issue price of the debt instrument from its face value. The resulting amount represents the discount that is gradually accreted over the life of the instrument.
Yes, OID is generally taxable as interest income to the bondholder. It is considered to be earned over the life of the debt instrument, even though it is not paid until maturity.
Bondholders must report OID as taxable income on their annual tax returns. The issuer of the debt instrument will provide the bondholder with a Form 1099-OID, which details the amount of OID earned during the tax year.
In certain cases, OID may be tax-exempt if the debt instrument meets specific criteria. For example, certain municipal bonds issued by state or local governments may be exempt from federal income tax, including OID.
Yes, there are exceptions to OID taxation. For example, if the debt instrument is a U.S. Treasury bond, OID is not taxable at the state or local level, although it is still subject to federal income tax.
No, OID cannot be deducted as an expense by the bondholder. It is treated as taxable income and must be reported accordingly.
Failure to report OID as taxable income can result in penalties and interest charges from the Internal Revenue Service (IRS). It is important to accurately report all taxable income to avoid any potential legal consequences.
Yes, OID can be sold or transferred to another party. However, the tax implications of such a transaction should be carefully considered, as the buyer or transferee may be responsible for reporting and paying taxes on the OID.
Yes, zero-coupon bonds are a type of debt instrument that does not pay periodic interest. Instead, the OID on zero-coupon bonds is typically accreted over time and taxed annually, even though the bondholder does not receive any cash payments until maturity.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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