What is the point of OID?

• A. OID occurs when a bond is issued at a discount to face value, providing the investor with upfront value
• B. OID occurs when a bond pays a higher coupon than market rate
• C. OID is the premium paid at maturity
• D. OID is the accrual method for interest on zero-coupon bonds only

Answer: (A)

Original Issue Discount is the difference between a bond’s face value and its issue price. When a bond is issued below its par value, the buyer effectively gains value upfront because they pay less than what they will eventually receive at maturity, with the remaining value representing interest that accrues over time as the bond approaches par. This accretion of the discount over the life of the bond is what yields the investor beyond the coupon payments, and it’s treated as interest income as it accrues.

So the statement that the point of OID is that a bond issued at a discount to face value provides the investor with upfront value captures the essence of OID. The other options don’t fit because OID isn’t tied to paying a higher coupon than the market (that describes coupon relative to market rates, not the issuance discount), it isn’t the premium paid at maturity (that would be a premium, not a discount), and OID isn’t limited to zero-coupon bonds or a special accrual method only for them.