easy · Private Credit loan-structures-instruments

In the context of PIK interest, what is 'compounding'?

1. The process where subsequent interest is calculated on the new, higher principal balance including prior PIK accruals.
2. The gradual reduction of the interest rate as the total outstanding loan debt balance keeps growing over time.
3. A contractual requirement to pay all of the accrued interest in a single lump sum at the end of the loan's first year.
4. The blending of multiple currencies for scheduled interest payments as a technique used to reduce foreign exchange rate risk.

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