OID (Original Issue Discount)
OID is when a loan is issued at a discount to par, increasing effective yield as the discount accretes.
Allocator relevance: High — meaningful yield component that interacts with prepayment risk and can distort “headline spread” comparisons.
Expanded Definition
If a lender funds at 98 for a 100 face amount, the 2-point discount contributes to yield over the life of the loan. OID can reflect market stress, borrower leverage, documentation complexity, or negotiation dynamics. Because OID is realized over time, early repayments can change the realized economics depending on contract terms and accounting treatment. Allocators treat OID as part of a full yield stack: base rate + spread + OID + fees − losses.
Decision Authority & Governance
Governance requires consistent recognition, transparent reporting of cash vs accrual yield, and clear treatment under prepayment scenarios. Allocators look for discipline: OID used as a real pricing tool, not a cosmetic performance enhancer.
Common Misconceptions
- OID is “free yield.”
- OID is irrelevant if spread is high.
- OID always signals distress.
Key Takeaways
- OID is a real yield driver but timing-sensitive.
- Prepayment behavior can materially change realized OID.
- Report cash vs accrual clearly for institutional trust.