Hello everybody,I have to price a PIK Bond... "Payment-In-Kind" bondBasically, it is like a Zero Coupon Bond but the coupon pay a number of bondSo, let's say I have 100,000 PIK bonds at 10% annual coupon, it will "pay" 10,000 bond at the end of each year, but no cash.So what could be the main difference with a basic Zero coupon bond ? Is the duration different ?thank sto all

seems like exactly the same thing, no?instead of a promise to pay back 150,000 in five years, you get:(1) a promise to pay you 100,000 in 5 years(2) a promise to give you (one year from now) a promise to pay 10,000 in year 5(3) a promise to give you (two years from now) a promise to pay 10,000 in year 5etc.

yep, it look to be the same, but in this case, why another name ?I am sure there is a catch somewhere....

Accruing the interest (i.e. PIK) has some practical differences from issuing at a discount. 1. Early repayment is simpler2. The accounting might be cleaner.

Another thought is that a bond that goes PIK from it's original terms is likely to have much higher default risk.

Why is there higher default risk? In the example of the 5 yr 10% PIK bond, it's the same default risk as a 150% zero coupon bond, right?I would imagine that the reason for issuing like this is that some clever person has found a tax or accounting loophole.

<<Another thought is that a bond that goes PIK from it's original terms is likely to have much higher default risk>>The case I was referring to is when a normal coupon paying bond goes PIK as a result of the inability to meet the interest payments but as a way of avoiding a default. It is one of a variety of "cures" that companies in that kind of situation take. I have never heard of anyone offering a PIK bond from the get go -- but I haven't been involved in the bond market in quite awhile...It was a "slighly" off-topic comment. But one meant to point out that the mere calculation of th PIK value does not necessarily capture all the risk in this situation...

i get it - a clever way to convert all your bonds to zero coupon! that must be a pretty handy little trick - given that equity holders have a vote but bondholders don't, they would vote for it!i wonder if anyone has issued an undated PIK ...

Mezzanine deals used for leverage on private equity deals often are issued as PIK. The main reason is to push the liabilities back to a point where the company is more likely to be generating free cash flow. Also, many times these deals will include an equity-kicker in the repayment.

why not just issue a zero coupon bond in the first place? what is the advantage of PIK over a zcb?

there are tax advantages for issuing PIK bonds vs. High yield ZcB. Mezz investors usually take down an equity kicker in addition to the debt investment, usually in form of warrants. Under tax law, if the Mezz investor owns warrants or stock he will be treated as 'connected to the closed company' and therefore the accruing tax decuction would be lost on the portion of the mezz investors interest. By issuing PIK bonds instead, the interest is considered paid and the accruing tax decuction is still obtained.

ok - makes sense - tnx