CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt
Compared with investment-grade public bonds, private debt investments most likely offer investors:
Private debt most likely offers a liquidity (illiquidity) premium as compensation for lower liquidity. Loans are rarely traded and valued infrequently, so investors require extra return. Daily market quotes belong to public bonds, and strong covenants alone do not explain lower expected returns.
- Aa liquidity premium in exchange for lower liquidityCorrect
- Bdaily pricing based on observable market quotes
- Clower expected returns because of stronger covenants alone
Explanation
Private debt is traded rarely and valued infrequently, so investors typically demand an illiquidity premium. Daily observable quotes are a feature of public bonds, not private loans. Covenants lower risk but do not by themselves make expected returns lower than public bonds.
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
- Which feature of a typical direct lending loan to a middle-market borrower most likely reduces the investor's exposure to rising interest ra…
- When valuing a private company using the market approach, an analyst applies an EV/EBITDA multiple from listed peers. The analyst would most…
- A limited partnership agreement includes a no-fault divorce clause. This provision most likely allows:
- A private credit fund has a loan book of USD 200 million yielding 9.0% gross. It expects annual credit losses of 1.5% of the book and charge…
- Compared with a fund's since-inception internal rate of return (SI-IRR), the multiple of invested capital (MOIC) of a private equity investm…
- 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…