Pay-in-kind (PIK) bonds are bonds where the issuer has the option to pay the interest in the form of additional bonds. In some cases the issuer has the option to issue additional bonds in lieu of interest only during the first few years of the issue.
Pay-In-Kind Bonds is type of bond that pays interest in additional bonds rather than in cash. Companies that may have cash flow difficulties in the first few years of a project usually issue this type of bond. These bonds usually carry a higher coupon (to compensate for the higher risk level). PIK bonds are utilized by the issuer to offer themselves some breathing room just in case the company incurs liquidity problems.
