Which term describes the scenario when interest is not paid in cash but rather added to the loan balance?

The term that best describes the situation where interest is not paid in cash but instead is added to the loan balance is PIK (Paid-in-Kind). This financial instrument allows borrowers to pay interest in the form of additional debt rather than immediate cash payments. Essentially, with PIK instruments, the interest accrues and compounds, increasing the total amount owed over time. This practice is particularly common in leveraged financing situations or when a borrower is cash-strapped, allowing them to conserve cash flow while maintaining their obligation to pay interest.

In contrast, "Cash flow bond" typically refers to debt instruments where interest payments are based on the cash flow generated by the underlying asset. "Payable Income Key" is not a widely recognized term in finance, making it less relevant in this context. "Deferred interest" refers to interest payments that are postponed to a later date, but it does not specifically imply that the interest is added to the principal balance. Additionally, while deferred interest may seem similar to PIK, the key distinction is that PIK results in an increase in the loan balance, while deferred interest might not necessarily do so. Thus, PIK captures the essence of the scenario accurately by highlighting the way interest is compounded onto the principal amount.