In effect, selling a bond at a discount converts stated principal into a return on investment, or interest.
In the United States, whether interest is adequate is determined with reference to the applicable federal rate (AFR).
The rules for calculating the original issue discount utilize a compounding interest formula, with the principal recalculated every six months.
[1] The daily portion of the discount uses a compounded interest formula with the principal recalculated every six months.
Original issue discount rules separate the portion of the repayment that is attributable to interest and then taxes that amount at ordinary income rates.