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CFA Level I · CFA Level I Exam · Fixed-Income Markets for Corporate Issuers

A borrower's syndicated term loan pays a floating reference rate plus a fixed margin. The borrower's credit quality deteriorates sharply but no covenant is breached. Relative to the loan's terms, the lenders' interest income is most likely to:

Lenders' interest income changes only if the reference rate moves. The margin is fixed in the loan agreement and does not reset automatically with credit deterioration, and the reference rate is a market benchmark that does not depend on the borrower's own credit quality.

  1. Arise automatically because the margin resets to reflect the new credit risk.
  2. Bchange only if the reference rate moves, because the margin is fixed.Correct
  3. Cfall because the reference rate declines with the borrower's credit quality.

Explanation

The reference rate is a market benchmark unrelated to the borrower's own credit, and the margin is fixed by the agreement unless it is tied to a pricing grid or amended. With no breach and no grid stated, interest changes only with the reference rate. The lenders bear the credit risk without added compensation.

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