FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
A direct-lending fund has USD 400 million of equity and borrows USD 200 million via a subscription line and credit facility at 7%. It invests the full USD 600 million in loans yielding 11% with no credit losses or fees. What is the return on equity?
The return on equity is 13.0%. Loan income is USD 66 million, interest cost is USD 14 million, leaving USD 52 million on USD 400 million of equity. Leverage adds half of the 4% spread to the 11% asset yield.
- A11.0%
- B13.0%Correct
- C15.0%
- D18.0%
Explanation
Interest income = 600 x 11% = 66. Interest cost = 200 x 7% = 14. Net = 52. ROE = 52/400 = 13.0%. Check: 11% + (200/400)x(11%-7%) = 13%. Option C ignores the borrowing cost on part of the leverage.
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