Feature on certain mezzanine or holdco notes giving the issuer the option each period to pay interest in cash or in additional principal (PIK). Pay-cash rate is lower (e.g., 10%); PIK rate is higher (e.g., 12.5%) to compensate the holder for the deferred cash and compounding. Used when the company's cash flow is volatile — toggling to PIK in a downturn preserves liquidity, while toggling back to cash in stronger years avoids the compounding drag. Typically the most expensive form of debt because the obligation grows over time without any cash outflow.