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Interest calculation with PIK

  1. #1
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    Interest calculation with PIK

    Hi guys -

    just a quick doubt.
    Let's say we have a loan with a principal of $100, bullet @year5
    interests: 3% cash and 5% pik
    how do you calculate the cash interest? 3% on the nominal value ($100) or on the nominal+accrued pik?

    So you calculate the 3% on $100 or $105 ($100+5% PIK)?

    Appreciated

    CC

  2. #2
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    Re: Interest calculation with PIK

    Quote Originally Posted by CC_ITA View Post
    Let's say we have a loan with a principal of $100, bullet @year5
    interests: 3% cash and 5% pik
    how do you calculate the cash interest? 3% on the nominal value ($100) or on the nominal+accrued pik?
    So you calculate the 3% on $100 or $105 ($100+5% PIK)?
    This is a financial question, not an Excel question. And this is an Excel forum site, not a financial forum site.

    We can help you translate a calculation into Excel. But typically, you need to tell us how to the calculation by hand.

    That said, sometimes you get lucky and your question is read by someone who knows what you are talking about. But beware of misrepresentation and misdirection.

    When you use special jargon (e.g. PIK), it would behoove you to define the terms. In this case, I assume you are talking about a payment-in-kind loan.

    I do not know anything about PIK loans. But a google search turned up some good references, notably http://www.fnbcp.com/what-is-payment-in-kind-pik-loan-interest in addition to the wikipage.

    Based on the FNBCP webpage, I would guess that it is 3% of $100 for the cash interest and 5% of $100 for the PIK interest.

    However, depending on the structure of the loan (which seems to vary considerably according to the cited websites), the $5 PIK interest might be added to the remaining principal for the following year.

    Thus, if the borrower does not pay down any principal the first year, the second-year calculation is 3% of $105 cash interest and 5% of $105 PIK interest.

    In that sense, it is 3% of the "nominal plus accrued PIK".

    Take all that with a grain of salt (meaning: some doubt). As I said, I do not know anything about PIK loans.

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