No Principal Repayments: Amortize the OID / # Years to Maturity each year. The Book Value of Debt on the Balance Sheet will increase by this amount each year, but the company still pays Cash Interest each year based on the $100 Face Value of the bond.

Why is OID amortized?

The legal structure of the original issue discount is designed to prevent manipulation of taxes and interest income. Since the income is amortized through the life of the bond, as opposed to calculated on maturity, purchasers of the OID are unable to defer income recognition.

How do I report a OID on a tax exempt bond?

For a specified private activity bond with OID, report the tax-exempt OID in box 11 on Form 1099-OID, and the tax-exempt stated interest in boxes 8 and 9 on Form 1099-INT. Exceptions to reporting. No Form 1099-INT must be filed for payments made to exempt recipients or for interest excluded from reporting.

What OID means?

Original Issue Discount (OID)

How do you OID?

The OID is the difference between the price paid for a bond and its face value. The OID may be considered interest since the buyer is paid the face value of the bond at maturity even though the purchase price was lower than the face value.

Why are original issue discount bonds called OID bonds?

Original issue discount ( OID) bonds are bonds that were issued at a discount to the face value of the bond. The reason why this occurs is because it takes a certain amount of time after the coupon rate has been determined to get regulatory approval for the bond issue.

What happens when you sell An OID bond before maturity?

If the bondholder sells the bond before maturity, then the sale must be reported on Form 8949, Sales and Other Dispositions of Capital Assets. A corporation issues an OID bond for $800 that pays $1000 upon maturity. However, because demand for the bond was less than anticipated, you pay only $700 to the issuer for the bond.

When does a debt obligation have significant OID?

Under Sec. 163 (i) (2), a debt obligation has significant OID if: The aggregate amount that would be includible in gross income with respect to the debt obligation for periods before the close of any accrual period (as defined in Sec. 1275 (a) (5)) ending after the date five years after the date of issue exceeds

How is the OID interest calculated on a bond?

The OID interest is calculated by the constant yield method: Note that the yield to maturity ( YTM ) is for the accrual period, so if the yield to maturity is 12% compounded semiannually, but the accrual period is 6 months long, then the YTM is half of that, or 6%.