medium · Private Credit 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 overall size of the lender full total claim in the event of a borrower liquidation
- PIK interest remains entirely tax-free for the lender until the final principal is repaid at loan maturity date
- PIK allows a struggling borrower to 'pay' interest without generating cash, potentially masking financial deterioration.
- PIK interest provides an immediate cash inflow to the lender, who must reinvest those proceeds at potentially lower market rates
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