PIK Interest Question
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!
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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