For example, if i had a $100 PIK note w 10% interest. Obviously at t0 we’d have interest of $0, at t1 we’d have interest of $10, but how about t2? Would it be $11 (10% * $100 + 10% of $10 that accrued to the principal), or would it just be $10 again? I would assume that as the principal balloons you pay interest on the entire amount, but just wanted to confirm.
Thanks
Yes, the PIK interest is added to the liability on the B/S I think. Over time, as you said you pay more interest, as it compounds. Obviously correct me if I am wrong.
Yeah, you generate incremental interest in the accrued balance is each period
Yeah, you generate incremental interest in the accrued balance is each period
Also - just an FYI. You often model PIK based on the starting balance, but cash interest on the average balance.
Do you know why?
Do you know why?
Is it just because it’d create circularity?
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