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CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt

A private debt fund lends to a company and receives its interest as additional principal added to the loan balance rather than in cash. This feature is best described as:

This is payment-in-kind interest. Instead of paying cash coupons, the borrower capitalizes the interest into the loan principal, which grows the balance. It conserves the borrower's cash but increases leverage and the lender's credit exposure over time.

  1. Aa covenant-lite structure
  2. Bpayment-in-kind interestCorrect
  3. Ca unitranche facility

Explanation

Payment-in-kind (PIK) interest accrues and is added to principal instead of being paid in cash, preserving borrower cash flow. Covenant-lite refers to fewer maintenance covenants; unitranche blends senior and subordinated debt into one facility.

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