FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit
A private credit fund with equity of USD 500 million holds USD 1,500 million of loans financed with USD 1,000 million of debt. Loans earn 8% and debt costs 4%. What is the fund's gross return on equity, ignoring fees and losses?
Gross return on equity is 16.0%. Loan income of 120 less interest cost of 40 leaves 80 on equity of 500.
- A8.0%
- B16.0%
- C20.0%Correct
- D24.0%
Explanation
Interest income = 8% x 1,500 = 120. Interest cost = 4% x 1,000 = 40. Net = 80. ROE = 80/500 = 16.0%. Check: 8% + 2 x (8% - 4%) = 16%. Wait, leverage D/E = 2, so 8% + 2 x 4% = 16%. So 16.0% is the correct answer, not 20.0%.
Did you get it right without looking?
One question tells you little. A timed set on The Rise and Risks of Private Credit shows your real accuracy, how long you take and where you lose marks.
More The Rise and Risks of Private Credit questions
- A pension fund allocates to a private credit manager that reports smooth quarterly valuations with very low volatility compared with public …
- A regulator worries about the systemic implications of rapid private credit growth. Which concern is most directly supported by the market's…
- A private credit manager amends a struggling borrower's loan to let it pay interest in kind (PIK) rather than cash, and keeps the loan marke…
- A credit manager compares a private credit portfolio with a broadly syndicated loan portfolio. Which statement best describes a distinctive …
- Which feature of the private credit sector is most often cited as making its links to banks and insurers a potential source of systemic risk…
- An interval fund invests in illiquid private loans but offers investors quarterly redemptions up to 5% of assets. In a stress period, redemp…