Payment-in-kind (PIK) bond

A bond that gives the issuer an option (during an initial period) either to make coupon payments in cash or in the form of additional bonds.

Payment In-Kind

1. Describing a bond or preferred stock in which coupon payments or dividends come in the form of more bonds or shares, rather than cash. At times, the investor has the option of choosing whether to accept cash or payment-in-kind, but, more often, this option resides with the issuer. A problem with PIK securities for the issuer is the fact that it becomes tempting to pay bond coupons with more debt rather than cash when the company has a liquidity problem. Of course, doing this often adds to the issuer's liquidity problems. Likewise, payment-in-kind securities can hurt investors as they must pay taxes on the market value of these securities and may lack the cash to do so. Payment-in-kind bonds were not unusual during the private equity boom in the mid-2000s, but became rare during the credit crunch at the end of the decade.

2. The act of compensating the seller of a good or service with another good or service rather than money. See also: Barter.