What is PIK interest?

What is PIK interest?

• A. Interest paid in cash as it accrues
• B. Interest charged on equity
• C. Interest added to the principal rather than paid in cash
• D. Interest forgiven if profits rise

Answer: (C)

PIK interest means payment-in-kind: interest is not paid in cash when it accrues, but is added to the loan’s principal. So the outstanding balance grows over time as the accumulated interest is rolled into the debt, and future interest compounding makes the total cost higher. This setup is common in mezzanine or distressed debt and can increase leverage because cash flows aren’t used to service the debt immediately. The other ideas describe cash interest, interest on equity, or forgiveness, which aren’t how PIK operates.

PIK interest means payment-in-kind: interest is not paid in cash when it accrues, but is added to the loan’s principal. So the outstanding balance grows over time as the accumulated interest is rolled into the debt, and future interest compounding makes the total cost higher. This setup is common in mezzanine or distressed debt and can increase leverage because cash flows aren’t used to service the debt immediately. The other ideas describe cash interest, interest on equity, or forgiveness, which aren’t how PIK operates.