FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
A credit manager compares a private credit portfolio with a broadly syndicated loan portfolio. Which statement best describes a distinctive risk of the private credit portfolio relative to the syndicated portfolio?
The distinctive risk is illiquidity: private loans lack an active secondary market, so selling before maturity may force a price discount. Bespoke covenants lessen but do not eliminate default risk, and valuation uncertainty remains because prices are not observable.
- AIt has no exposure to borrower default because lenders negotiate bespoke covenants
- BIt lacks a liquid secondary market, so exit before maturity may require selling at a discountCorrect
- CIt carries no valuation uncertainty because loans are held at amortized cost by all lenders
- DIt is exposed to interest rate risk only through fixed-rate coupons
Explanation
Private loans trade rarely, so liquidity risk and discounted exits are key distinguishing risks. Covenants reduce but do not remove default risk. Valuation uncertainty persists, particularly for fair-valued funds. Most private loans are floating-rate, so the statement on fixed coupons is wrong.
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