Payment in Kind - Explained
What is Payment in Kind?
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What is Payment-In-Kind?
When we use products or services to make a payment in place of cash, it is said to be a PIK (Payment-in-Kind). It also means a financial tool that makes payment of dividends or interest to the stockholders of notes, certificates, bonds, and preferred shares with extra securities and capital in place of cash.
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How Does Payment-In-Kind Work?
PIK is a kind of financing known as Mezzanine Financing, in which they have features related to loan and equity. PIK is likely to make payment of high-interest rates, but at the same time, they involve a great deal of risk. Still, there are investors, who can bear risk-taking more than average, for example, most often, hedge fund organizers and private capital shareholders prefer to make an investment in PIK securities.The PIK notes provide an opportunity to the issuer to detain paying the dividends in the form of cash. As a return for this holdup, on the note, the issuer, say the bank normally agrees to propose a higher return rate.To explain the concept of PIK notes function, lets suppose, an issuer proposes PIK notes of 2 million US dollars to a struggling form. There is a ten percent interest rate on these PIK notes. Their maturity period is almost ten years. They incur two lac US dollars interest every year. However, the financier adds interest to the loan in kind instead of asking the company to make repayment of the principal amount or interest. This makes more loan. Consequently, at the end of the 1st year, the firm is obliged to repay 2.2 million US dollars. This amount keeps increasing until the maturity date of the debt when the cash will be payable.Most of the time, Payment-in-Kind notes settle with the fraction of a firms overall owing loans. The money man structures them so that their maturity period may be later than the firms other loans. Hence, the firm is able to pay attention to the repayment of old debts or loans linked to cash dividends faster. But at the same time, it can add extra risk to the money man. In order to cover this risk, many of the money men stipulate an advance payment penalty for increasing the potential income.PIK also refers to the acceptance of cash substitutes for services or tasks, for instance, a field hand is provided free board and a room as a replacement of getting an hourly pay. This is in an interchange of assisting in the fields. So, this is an illustration of PIK. The IRS (Internal Revenue Service) calls the PIK a bartering income. The persons, who get earning by bartering, are required to add it in their income tax and report the tax return authorities. Say, a plumber gets some quantity of meat and provides his services in its exchange. He is liable to report the just market value of the meat or his normal fee being his earning on the income tax return.