What does PIK interest mean?

PIK interest refers to "Payment In Kind" interest, which means that instead of receiving cash payments for interest, the interest is added to the principal balance of the loan or bond. This arrangement allows borrowers to defer cash payments and increase their debt load over time, which can be beneficial for companies that need to preserve cash flow during challenging periods. By adding the interest to the principal, the borrower will owe more in the future when the total amount must be paid back.

Other options may suggest that cash interest payments occur right away, that interest is completely ignored, or that payments are somehow diminished based on bond ratings. Understanding PIK interest is crucial for evaluating the overall financial health and responsibilities of companies using this financial tool.