Year 0 impact of a $100 PIK note with a 10% rate on the income statement, cash, and debt is which of the following?

• A. Income statement unchanged; cash increases by $100; debt increases by $100
• B. Income statement shows a $10 gain; cash increases by $110; debt unchanged
• C. Income statement unchanged; cash decreases by $100; debt increases by $100
• D. Income statement unchanged; cash unchanged; debt increases by $100

Answer: (A)

This question tests how a payment-in-kind (PIK) note behaves at issuance. A PIK note is debt where interest is paid in kind, meaning you don’t pay cash interest upfront; instead, the interest accumulates into the principal.

At Year 0, the company receives cash from issuing the note, so cash goes up by the face amount of the note. The total debt also increases by the same amount since you now owe that principal. There is no cash interest paid and no interest expense recognized yet in the income statement at the moment of issuance, so the income statement remains unchanged. The 10% rate matters for future periods when interest accrues (and would add to the principal if paid in kind), but not for Year 0.

So the correct outcome is: income statement unchanged; cash increases by 100; debt increases by 100.