So my understanding of PIK interest is that instead of cash interest, the interest gets added to the debt amount.
So for example, If there's $100 of debt and the PIK interest rate is 10%, the interest would be $10 and the new debt would be $110. In the next fiscal year then, will the PIK interest be 10% of $110 or stay at $10? Basically I'm asking if the interest rate applies to the new overall debt amount or just the initial principal amount. Thank you!
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PIK interest is almost always compounding interest, so it'd be 10% of $100, then 10% of $110, then 10% of $121..
Thank you!
It's compounding. It also generates phantom income, so be careful.
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