What is the term for the difference between the stated redemption price and the issue price of a debt instrument?

The term for the difference between the stated redemption price and the issue price of a debt instrument is known as Original Issue Discount (OID). This concept is integral in taxation and accounting because it affects how the income from the debt instrument is recognized over time.

When a debt instrument, such as a bond, is issued at a price lower than its stated redemption price, the difference represents interest that will be earned over the life of the instrument. Rather than receiving all the interest payments upfront, the investor is compensated through this discount. As the bond matures and reaches its stated redemption price, the accrued amount from the discount is treated as interest income, which must be reported for tax purposes.

Understanding OID is crucial for tax planning and compliance because it dictates how and when income is recognized on such financial instruments. This distinction is particularly important for investors and individuals who hold bonds or other debt securities, as it affects the timing and amount of reported income.