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Original Issue Discount (OID) is the difference between the original face value (principal) of a debt security and the price that a new investor pays to acquire it at the time of its issuance. OID bonds are long-term investments that offer investors the potential to benefit from gains if the bonds are purchased at a discounted price.
Because these bonds are typically issued when a company’s credit worthiness is questionable, the discounted pricing serves as an incentive for investors to buy the bonds even though the issuer’s credit rating is low. As such, it is important for investors to understand the various risks associated with purchasing OID bonds.
Investors who buy OID bonds may have difficulty understanding the company’s financial situation and therefore, could be exposing themselves to substantial risk if the company defaults and the bonds become worthless. Investors should always evaluate the issuer’s creditworthiness and its ability to meet the OID bond's terms before buying any OID bonds.
In addition to the credit risk, OID bonds may also be subject to price fluctuation risks. The discounted bonds may decrease in value if the market rate of interest is higher than the rate at which the bonds were sold. This could result in losses since the market rate of interest will be higher than the OID bond's discounted interest rate at the time of its issuance.
Investors should research any OID bond thoroughly before investing and should always consult with a financial advisor in order to understand how the bond may fit into their portfolio. By doing their research and understanding the potential risks, investors can make informed decisions that may lead to gains in the long run.
Because these bonds are typically issued when a company’s credit worthiness is questionable, the discounted pricing serves as an incentive for investors to buy the bonds even though the issuer’s credit rating is low. As such, it is important for investors to understand the various risks associated with purchasing OID bonds.
Investors who buy OID bonds may have difficulty understanding the company’s financial situation and therefore, could be exposing themselves to substantial risk if the company defaults and the bonds become worthless. Investors should always evaluate the issuer’s creditworthiness and its ability to meet the OID bond's terms before buying any OID bonds.
In addition to the credit risk, OID bonds may also be subject to price fluctuation risks. The discounted bonds may decrease in value if the market rate of interest is higher than the rate at which the bonds were sold. This could result in losses since the market rate of interest will be higher than the OID bond's discounted interest rate at the time of its issuance.
Investors should research any OID bond thoroughly before investing and should always consult with a financial advisor in order to understand how the bond may fit into their portfolio. By doing their research and understanding the potential risks, investors can make informed decisions that may lead to gains in the long run.