SMART NB (LBO MODEL) EXAM QUESTIONS AND
ANSWERS WITH COMPLETE SOLUTIONS VERIFIED
OID
original issue discount - difference between face value (or par value) of debt instrument
and its issue price
- If bond w/ face value = 1000 is issued for 950, OID is 950
Amortization of OID
· process of gradually recognizing the OID as interest income (for the lender) or interest
expense (for the borrower) over the life of the debt instrument. The amortization is
typically done using the effective interest method, which allocates the discount over the
term of the bond in a way that reflects a constant rate of return.
o Formula: -min(OID BOP balance/(Term-the year+1),BOP balance)
o The idea is you're allocating discount over term of bond
OID recognized in repayment
- when the debt instrument is repaid at maturity, the remaining unamortized OID must
be fully recognized. This means that any portion of the OID that has not yet been
amortized will be accounted for at the time of repayment
o Basically, also recognized as interest expense...
o The repayment formula is calculated by taking the total OID that hasn't been
amortized and multiplying it by the proportion of what's been paid / drawdown vs. the
ANSWERS WITH COMPLETE SOLUTIONS VERIFIED
OID
original issue discount - difference between face value (or par value) of debt instrument
and its issue price
- If bond w/ face value = 1000 is issued for 950, OID is 950
Amortization of OID
· process of gradually recognizing the OID as interest income (for the lender) or interest
expense (for the borrower) over the life of the debt instrument. The amortization is
typically done using the effective interest method, which allocates the discount over the
term of the bond in a way that reflects a constant rate of return.
o Formula: -min(OID BOP balance/(Term-the year+1),BOP balance)
o The idea is you're allocating discount over term of bond
OID recognized in repayment
- when the debt instrument is repaid at maturity, the remaining unamortized OID must
be fully recognized. This means that any portion of the OID that has not yet been
amortized will be accounted for at the time of repayment
o Basically, also recognized as interest expense...
o The repayment formula is calculated by taking the total OID that hasn't been
amortized and multiplying it by the proportion of what's been paid / drawdown vs. the
