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April 30, 2024
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What do you mean by coupon payment remains fixed? That makes no sense to me. PIK usually increase your principal amount. Therefore, your payment in $ amount increase over time. I guess coupon rate will always stay the same as a percentage of principal? In this case, I'm case the payment is in fixed $ despite that principal increase?
I guess what I’m getting at is a scenario similar to the following: - $1,000 note with a fixed coupon payment of $100 but the option for a set period of time to PIK 25% of the interest
For a standard PIK instrument, this would increase your total interest expense as the principal is increasing, but was just wondering if anyone had ever seen a case where the lender just allows the PIK portion to be paid off at maturity but wouldn’t increase the interest expense (the “$100”)?
In the scenario you laid out, the investor / lender would be foregoing a portion of the cash interest today to be paid the exact same amount in the future. That's finance 101 (time value of money), no one would agree to that. That's why PIK interest compounds
Yeah, would be really strange to accept that IMO.
Why couldn't they just increase the PIK interest rate such that it equaled the yield at maturity to that of a lower rate with compounding? As long as there are prepayment penalties, I don't see an effective difference.
You mean simply non compounding? I've seen a PIK accrual without compounding but I wouldn't call it borrower friendly... it was a 30% interest rate.
No clue why any lender would do that.
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