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FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit

An analyst compares the effect of a sharp decline in policy rates on a private credit lender versus a bank. Which outcome is most plausible for a direct-lending fund with unhedged floating-rate assets and fixed-cost fund-level borrowing?

Falling base rates reduce income on floating-rate loans, but fixed-cost fund financing does not reprice, so net interest margin is compressed. This repricing mismatch is the key exposure, while borrowers' credit quality would typically improve as their interest burdens fall.

  1. APortfolio yield falls with base rates while financing costs stay fixed, compressing net interest marginCorrect
  2. BPortfolio yield rises because loan spreads widen automatically
  3. CBorrower credit quality deteriorates because interest burdens increase
  4. DNet interest margin is unaffected because assets and liabilities match perfectly

Explanation

Floating-rate assets reprice down with base rates, but fixed-rate funding does not, so the spread narrows. Lower rates generally ease borrower burdens, so C is wrong. B and D have no basis given the mismatch.

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