Series 79 practice questioneasyCapital Structure Analysis
Which feature best describes payment-in-kind, or PIK, interest?
- AInterest converts automatically into common stock at maturity
- BInterest is paid only if EBITDA rises
- CInterest is satisfied by increasing principal rather than paying current cash✓ Correct answer
- DInterest is treated as a dividend for tax purposes
Explanation
Why C — Interest is satisfied by increasing principal rather than paying current cash
Interest is satisfied by increasing principal rather than paying current cash PIK instruments conserve cash in the near term because unpaid interest compounds into the outstanding balance. That flexibility helps highly levered issuers, but it also increases credit risk because debt grows over time.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 477+ Series 79 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Related Collection, Analysis & Evaluation of Data questions
- Which covenant metric is most directly designed to protect lenders against a borrower’s declining ability to service…
- What is the main purpose of a revolving credit facility in a sponsor-backed capital structure?
- What is a springing maturity in a credit agreement?
- Why is preferred stock usually viewed as sitting between debt and common equity in the capital structure?