A payment-in-kind (PIK) bond is a type of bond that pays interest in additional bonds rather than cash during an initial period. This increases the principal amount over time as interest compounds. PIK bonds carry higher yields due to the higher risk of default from issuers taking on additional debt to pay interest. The risk tends to be higher because PIK bonds generally mature within five years.

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DEFINITION
A payment-in-kind (PIK) bond refers to a
type of bond that pays interest in
additional bonds rather than in cash during
the initial period
KEY POINT 1
The bond issuer incurs additional debt to
create the new bonds for the interest
payments. Payment-in-kind bonds are
considered a type of deferred coupon
bond since there are no cash interest
payments during the bond's term
EXAMPLE
Let’s assume a company issues
a corporate bond with a principal
amount of $10 million due to
mature in seven years. The terms of
the bond include a 9% cash coupon
payment and 6% PIK interest to be
paid annually. In the first year,
bondholders will receive a cash
payment of $900,000 (9% x $10
million), while $600,000 (6% x $10
million) is paid in additional bonds.
This increases the principal amount
of the issue to $10.6 million ($10
million + $600,000). This continues
to be compounded until the end of
the seventh year. At this point, the
lender will receive the payment-in-
kind interest in cash when the bond
is paid at maturity
.
KEY POINT 2
The risk of default by PIK bond
issuers tends to be higher, which is
why they normally have
higher yields. Payment-in-kind
bonds generally mature within five
PIK BOND

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DEFINITION
A payment-in-kind or PIK loan is a loan where the
borrower can make interest payments in forms other
than cash. The PIK loan enables the debtor to borrow
without having the burden of a cash repayment of
interest until the loan term is ended. PIK loans are
commonly used in leveraged buyout (LBO) transactions
KEY POINT
Though a PIK loan offers high
growth potential, it is also very
expensive and risky. Its interest is
higher than other loans that are
charged on a compound basis.
The loans do not generate any
cash flow before term. They tend
to lead to large losses in the
event of a default
ADVANTAGE
PIK loans are taken if a company
has a liquidity problem but has
the capability to pay interest
without paying in cash form
ADVANTAGE
This is attractive to companies
that want to avoid making current
cash outlays for debt
interest such as during a
management or leveraged buyout
or during a growth phase of the
business. In order to protect their
liquid assets, companies pay their
liabilities with the help of new
liabilities
PIK LOAN