Original issue discount
Capital MarketsA loan or bond sold below par, so the lender earns the difference on top of the coupon without the headline rate changing.
Also written: OID
A loan advanced at 98 repays 100 at maturity. The lender puts in less than it gets back, and that two point difference lifts the yield above the stated coupon.
Its purpose is to clear a deal in a weak market without repricing the coupon. A bank that has underwritten at a given spread and cannot place it can improve the economics through discount rather than admit a higher rate, which matters because the coupon is what the market sees.
For the borrower it is a real cost: it receives 98 and owes 100, so the discount is an additional financing charge amortised across the life of the instrument and added to interest expense.
Flex language in a commitment letter usually specifies how much OID the arrangers may apply before needing further consent, which is exactly why the flex limits are negotiated so hard.
Worked example
A 500 term loan issued at 98 delivers 490 of proceeds against 500 repayable, so 10 of discount.
On a five year loan that adds roughly 40 basis points to the effective yield, without the quoted margin moving at all.