medium · Private Credit & Debt loan-structures-instruments
Which of the following is a primary reason why PIK interest is considered riskier for a lender than cash-pay interest?
- PIK interest reduces the total claim size in the event of a borrower liquidation.
- PIK interest is tax-free for the lender until the final principal is repaid at maturity.
- PIK allows a struggling borrower to 'pay' interest without generating cash, potentially masking financial deterioration.
- PIK interest provides an immediate cash inflow that the lender must reinvest at potentially lower rates.
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