Skip to content

FRM Part II · FRM Exam Part II · Private Markets Investing

A pension fund evaluates a regulated utility-like infrastructure investment with long-term inflation-linked revenues financed by fixed-rate debt. Which risk is most directly increased by a sharp, sustained rise in interest rates?

Rising interest rates mainly increase valuation and refinancing risk for long-lived infrastructure. Higher discount rates reduce the present value of long-dated cash flows, and debt that must be refinanced costs more, pressuring debt coverage, whereas construction risk is not relevant to an operating asset.

  1. ARefinancing and valuation risk, as higher discount rates lower asset values and raise future debt costsCorrect
  2. BConstruction risk, because the asset is already operating
  3. CCommodity price risk, because revenues are inflation-linked
  4. DAppraisal smoothing risk, because rates change appraisal frequency

Explanation

Infrastructure value is the present value of long-dated cash flows, so higher discount rates reduce valuations, and debt maturing during the period must be refinanced at higher cost, squeezing coverage ratios. Construction risk is not relevant to an operating asset, and inflation-linking does not create commodity exposure.

Did you get it right without looking?

One question tells you little. A timed set on Private Markets Investing shows your real accuracy, how long you take and where you lose marks.

Practise Private Markets InvestingFree diagnostic mock

More Private Markets Investing questions