CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt
A mezzanine loan of 10 million pays 6% cash interest and 4% payment-in-kind (PIK) interest annually, with PIK interest added to principal and compounding. Assuming no default and no repayment, the loan balance owed at the end of year 2 is closest to:
The balance is about 10.82 million. Only the 4% PIK interest compounds into principal, giving 10 million × 1.04 squared, or 10.816 million. The 6% cash interest is paid out, so it does not increase the balance.
- A10.80 million
- B10.82 millionCorrect
- C11.00 million
Explanation
Only the 4% PIK accrues to principal: 10 × 1.04 = 10.40; 10.40 × 1.04 = 10.816, about 10.82 million. The 10.80 figure uses simple PIK accrual; the 11.00 figure wrongly adds the cash interest to principal.
Did you get it right without looking?
One question tells you little. A timed set on Investments in Private Capital: Equity and Debt shows your real accuracy, how long you take and where you lose marks.
More Investments in Private Capital: Equity and Debt questions
- An investor holds a portfolio of public equities and investment-grade bonds and considers adding a senior secured direct lending fund. The d…
- A fund's gross IRR is higher than the net IRR received by its limited partners. The difference is most likely explained by:
- Venture debt provided to an early-stage company most likely includes which feature to compensate the lender for the borrower's high risk?
- In a private equity fund, the hurdle rate (preferred return) is most likely:
- A private debt fund lends EUR 100 million at a fixed 9% annual rate. Over the year, loans representing 5% of the portfolio default, with a r…
- A private equity fund has a deal-by-deal (American) waterfall. Compared with a whole-of-fund (European) waterfall, the American waterfall mo…