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.
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payment-in-kind security (PIK)
A relatively unusual type of security that allows the issuer to pay the investor with additional shares (in the case of PIK preferred) or with bonds (in the case of PIK bonds) rather than with cash. Payment-in-kind bonds and preferred stock may cause cash flow problems for investors who must pay income taxes on the market value of the additional securities received. PIK securities nearly always originate as a result of a leveraged buyout.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.