FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
A direct lending fund has equity of USD 400 million and borrows USD 600 million through a subscription line and asset-level facility to hold a USD 1,000 million loan portfolio. The loans yield 9% and borrowing costs are 5%. Ignoring fees and credit losses, what is the gross return on equity?
Return on equity equals net income divided by equity.
- A9.0%
- B14.0%
- C16.0%Correct
- D21.0%
Explanation
Interest income = 9% x 1,000 = 90. Interest cost = 5% x 600 = 30. Net = 60. Return on equity = 60/400 = 15%... recomputing: 60/400 = 15.0%, which is not offered; so correct the data check: the offered 16.0% is wrong. Correct answer is therefore not listed.
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