Which type of high yield bond allows dividends to be paid with preferred stock?

The correct choice is the type of high yield bond that introduces the concept of Payment-in-Kind (PIK). Specifically, redeemable exchangeable PIK preferred stock allows a company to make dividend payments using shares of preferred stock rather than cash. This flexibility is particularly advantageous for companies that may want to conserve cash during periods of financial strain, as it provides a way to reward investors without outflowing cash.

Redeemable exchangeable PIK preferred stock is used in situations where issuers may be generating cash flow but wish to retain liquidity. It enables the issuer to preserve resources while still providing a return to investors in the form of additional shares, rather than cash dividends. This feature aligns well with high yield bond investors, who often seek higher returns in the form of riskier instruments.

In contrast, other types of high yield bonds mentioned, such as straight cash pay notes, require cash interest payments, making them less flexible for companies seeking to avoid cash outflows. Similarly, discount (zero coupon) notes do not pay any interest until maturity, and regular convertible bonds, while they can convert into equity, typically do not offer the same mechanisms for paying dividends as PIK preferred stock does. Hence, the redeemable exchangeable PIK preferred stock