What are Payment in Kind (PIK) Bonds?
How Do Payment in Kind (PIK) Bonds Work?
Instead of the returns on a bond being paid in cash, the dividend is returned to the bond buyer in the form of additional principal (more bonds). Usually, the issuer has the option to deliver more bonds during an initial period, instead of a coupon payment.
Why Do Payment in Kind (PIK) Bonds Matter?
PIK bonds are used by the issuer to give themselves some breathing room in case the company runs into liquidity problems. By triggering the provision to issue the buyer more bonds (more debt), the company lessens the need to make cash payments on the bond coupon to the bond buyer. However, it does result in more debt (because of the dividend that will need to be paid to the buyer of more bonds). At some point, the debt needs to be repaid. However, with the company overleveraged, it can sometimes run into problems.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
In early 2009, investors latched on to Netflix (Nasdaq: NFLX), boosting shares from $...Read More →
Looking for a high-yield investment that is also designed to protect you from...Read More →
Gift cards have surpassed all other categories as the most popular gift, according to the National Retail Federation. Here's a news flash, however: If this is the extent of your gift card...Read More →