Mezzanine debt commonly splits its return between cash-pay interest and PIK (“payment in kind”) interest that compounds into the principal instead of being paid in cash.
How it works
Cash interest is simply principal times rate times years. PIK interest compounds: the principal grows at the PIK rate each year, and the growth beyond the original principal adds to the total cost alongside the cash interest paid.
What this does not include
Many mezzanine deals also include an equity “kicker” (warrants or a small equity stake) on top of the cash and PIK interest — this calculator computes the debt-like cost components only, not any equity upside the lender might also receive.
How to use this calculator
- Enter principal, cash interest rate, PIK rate, and term in years.
Frequently asked questions
Why would a lender accept PIK interest instead of all-cash interest?
PIK interest lets a growing or cash-constrained borrower conserve cash during the loan term, in exchange for the lender ultimately receiving a larger repayment at maturity.
Where does mezzanine debt sit in a company’s capital structure?
Between senior secured debt and equity — subordinate to senior debt but ahead of common equity in a liquidation, which is why it typically carries a higher rate than senior debt.
Why is mezzanine debt more expensive than senior debt?
Its subordinated position means mezzanine lenders take on more risk than senior secured lenders, and that added risk is priced into the higher combined cash and PIK rates.
