Payment-in-kind (PIK) bond

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.

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Payment-in-kind (PIK) bond

A bond in which coupon payments come in the form of more bonds, 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 bonds for the issuer is the fact that it becomes tempting to pay coupons with more debt rather than cash when the company has a liquidity problem. Of course, doing this often only adds to the issuer's liquidity problems. This type of bond was not unusual during the private equity boom in the mid-2000s, but became rare during the credit crunch at the end of the decade.