Original Issue Discount (OID)

Original issue discount is the amount by which a debt instrument is issued below its face (par) value — for example, a loan issued at 98 has 2 points of OID. The borrower receives 98 but owes 100, so the discount is extra economics for lenders, boosting their effective yield above the stated coupon.

OID is common in leveraged loan and high-yield syndications, especially as a market-clearing lever: if demand is weak, arrangers widen OID (and/or spread) to get the deal done. In modeling, net debt proceeds in sources and uses are reduced by OID, and the discount is amortized as non-cash interest expense over the life of the debt (effective interest method).

For yield math, a rough intuition: points of OID amortized over the expected life add roughly that many points divided by years-to-repayment to the annual yield (e.g., 2 points over 4 years adds roughly 50 bps).