FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
A private credit fund holds USD 500 million of loans funded by USD 300 million equity and USD 200 million debt. Loans lose 10% of value in a downturn, with no other changes. Ignoring fees, what is the percentage loss to equity, and what leverage multiplier (assets/equity) explains it?
Equity loses 16.7%. A 10% fall on USD 500 million of loans is a USD 50 million loss, which is 50/300 of equity. This equals the 10% asset loss times the assets-to-equity multiplier of 1.67.
- A10%, multiplier 1.00
- B16.7%, multiplier 1.67Correct
- C20.0%, multiplier 2.00
- D50.0%, multiplier 5.00
Explanation
Asset loss = 500 x 10% = 50. Equity falls from 300 to 250, a loss of 50/300 = 16.7%. The multiplier is 500/300 = 1.67, and 10% x 1.67 = 16.7%. Option C wrongly uses debt/equity plus 1 in error, i.e. 200 as the base.
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