Skip to content

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

A private equity sponsor is financing a leveraged buyout with senior secured loans and a layer of mezzanine debt. Relative to the senior loans, the mezzanine debt most likely:

Mezzanine debt ranks below senior loans in the capital structure, so it has a lower claim priority. Because of the added risk, it commands a higher expected return, often through higher interest, payment-in-kind features or equity warrants.

  1. Ahas a lower claim priority and a higher expected returnCorrect
  2. Bhas a higher claim priority and a lower expected return
  3. Chas the same claim priority but a longer maturity

Explanation

Mezzanine debt is subordinated to senior debt, so it bears more risk and compensates with higher interest, often with PIK interest or equity warrants. The second option reverses the ranking.

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.

Practise Investments in Private Capital: Equity and DebtFree diagnostic mock

More Investments in Private Capital: Equity and Debt questions