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 ?