What are 'Payment-In-Kind Bonds'
A type of bond that pays interest in additional bonds rather than in cash. The bond issuer incurs additional debt to create the new bonds for the interest payments. Payment-in-kind bonds are considered a type of deferred coupon bond since there are no cash interest payments during the bond's term.
BREAKING DOWN 'Payment-In-Kind Bonds'
The types of companies that issue these bonds may be financially distressed and their bonds may have low ratings but pay interest at a higher rate. Because payment-in-kind bonds are an unusual and high-risk product, they appeal mainly to sophisticated investors such as hedge funds. Investors seeking cash flow should not purchase payment-in-kind bonds.