What is original issue discount (OID), and how does it affect effective yield?

A bond or loan is issued below par. Example: issued at 98 but repaid at 100.

The investor receives coupon plus pull-to-par return, so effective yield is higher than coupon.

OID can make the headline coupon look lower while still giving investors the yield they require.

Volatile markets, leveraged loans, HY bonds, LBO refinancings, or deals needing extra investor concession.

OID is generally amortized over the life of the instrument as additional interest expense / income.

In a stressed HY market, OID is often the clearing tool when issuers resist raising the visible coupon.