OID (original issue discount)

OID (Original Issue Discount) is the difference between the par value of a debt instrument and the lower price at which it is actually subscribed at issue. A loan with a par value of 100 placed at 98 is issued with an OID of 2: the lender advances 98 but will be repaid 100 at maturity, this gap forming an additional yield on top of the coupon.

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The original issue discount is a tool for adjusting the yield of a financing, common on the institutional Term Loan A vs Term Loan B (TLA vs TLB) and leveraged bond market. It lets the lender raise its effective yield without increasing the face coupon, and lets the borrower attract subscribers when market conditions tighten. In this respect OID is akin to the credit Spread, which it complements in the analysis.

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By way of example, a term loan of 10 MCHF par is placed at 98%, that is an OID of 2%: the lender disburses only 9.8 MCHF but will be repaid 10 MCHF at maturity. This gap lifts its effective yield beyond the face coupon alone.

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To measure the true cost of debt carrying an OID, one must reason in terms of yield to maturity rather than the nominal rate alone. In financial structuring, factoring in the original issue discount avoids understating the effective cost of the financing and informs the comparison between several debt sources.