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I am developer working in the financial field and I would like to understand what I'm doing.

My latest work subject involves Payment In Kind bonds with coupons fully reinvested (e.g, no coupons partially received as cash, so, a Deferred Interest Bond). As I understand these assets, they "sort of" pay you coupons, but in the form of increasing the nominal of the bond, in a way fully determined at the emission of the bond.

Forgive my simplistic view of things, but isn't that precisely what Y Zero-coupon bonds with maturity T of market price X/Y do ? Pay X on date 0, receive Y on date T, Y is known from the start. End of story.

I hardly care about what Y represents and that it was obtained by simulating reinvested periodic coupons. Assuming that Y is predetermined, I fail to see the reason PIK bonds exist. I was told that PIK bonds and Zero-coupon bonds were "Very different in accounting", but I also don't see why they would be. From date 0 to date T, you are in the same situation of being supposed to receive Y on date T.

On the dates when the coupon payments are due, the accrued interest on PIK debt is paid through the additional issuance of bonds, notes, or preferred stock. - Investopedia

Therefore, for these bonds to have a reason to exist, I would expect Y to not be known from the start. Is that the case, and if it is : what actually happens when a "coupon" is paid ? If additional bonds issued by the PIK bond issuer are used to pay, does the bond yield depend on the current yield investors ask of this company ?

Thanks.

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  • $\begingroup$ I don't know accounting or PIK bonds, but I suspect that the statement that "ZCB and PIK bonds are very different in accounting" is true and important to this question as to why PIK bonds exist and how the are used. $\endgroup$ – noob2 May 16 at 13:16

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