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

Compared with a senior secured direct loan, mezzanine debt issued by a private company is most likely to:

Mezzanine debt ranks below senior secured loans in the capital structure, so lenders face greater loss risk. They are compensated with a higher expected return, often through higher interest, payment-in-kind interest or equity warrants.

  1. Arank lower in the capital structure and offer a higher expected returnCorrect
  2. Brank higher in the capital structure and offer a lower expected return
  3. Ccarry a floating rate with no equity-linked features and a lower expected return

Explanation

Mezzanine debt is subordinated to senior debt, so it bears more credit risk and compensates lenders with a higher coupon, often with PIK interest or warrants. The second option reverses the ranking. The third is wrong because mezzanine often has equity kickers and a higher return.

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