CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt
A private debt fund buys a loan at par with a floating rate of 3-month reference rate plus 6.0% and a reference rate floor of 2.0%. If the reference rate falls to 0.5% for the year, the loan's annual coupon rate is closest to:
The coupon is about 8.0%. The reference rate floor of 2.0% applies because the market rate of 0.5% is lower, so the rate used is 2.0% plus the 6.0% spread. Ignoring the floor would wrongly give 6.5%.
- A6.5%
- B7.0%
- C8.0%Correct
Explanation
The floor sets the minimum reference rate at 2.0%. Because 0.5% is below the floor, the coupon is 2.0% + 6.0% = 8.0%. Using 0.5% gives 6.5% (ignoring the floor); 7.0% is another unsupported figure.
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
- A private equity fund acquires a mature, cash-generative manufacturer using a high proportion of borrowed money, with the target's own asset…
- A limited partner in a private equity fund reviews the fund's performance report. The fund has called 80% of committed capital, and distribu…
- A fund has a carried interest of 20% with an 8% hurdle rate and a full catch-up, and distributions follow a whole-of-fund waterfall. LPs con…
- A pension fund holds a portfolio of floating-rate senior secured direct loans. Relative to a portfolio of fixed-rate long-term corporate bon…
- A venture investor commits $10 million to a company today and receives a single payment of $32.8 million at the end of Year 4, with no other…
- An investor reports that a private debt fund shows low volatility and low correlation with listed high-yield bonds. The most appropriate int…