What is an Original Issue Discount (OID) in debt instruments?

What is an Original Issue Discount (OID) in debt instruments?

• A. Debt issued at a premium.
• B. Debt issued at a discount; the discount must be accreted and increases the liability; OID should be added to debt balance when calculating EV bridge.
• C. A stock option.
• D. A derivative used for hedging.

Answer: (B)

Original Issue Discount is the difference between the face value and the issue price of a debt instrument issued below par. This discount isn’t paid upfront; it is accreted over the life of the loan, increasing the liability on the balance sheet and the interest expense recognized. In enterprise value analysis, you use the debt’s carrying value, which grows by the accreted OID toward maturity, so it should be added to the debt balance when calculating an EV bridge. The other options describe a debt issued at a premium or refer to types of instruments that are not OID.

Original Issue Discount is the difference between the face value and the issue price of a debt instrument issued below par. This discount isn’t paid upfront; it is accreted over the life of the loan, increasing the liability on the balance sheet and the interest expense recognized. In enterprise value analysis, you use the debt’s carrying value, which grows by the accreted OID toward maturity, so it should be added to the debt balance when calculating an EV bridge. The other options describe a debt issued at a premium or refer to types of instruments that are not OID.