CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt
Compared with public investment-grade bonds, private debt such as direct loans to mid-sized companies most likely offers investors:
Private debt most likely offers a liquidity (illiquidity) premium. Because the loans are not exchange-traded and are hard to sell, investors demand additional yield. Pricing is infrequent and model-based, and borrowers typically carry more credit risk than investment-grade issuers.
- Aa liquidity premium in exchange for lower liquidityCorrect
- Bdaily pricing based on exchange quotes
- Clower exposure to borrower default risk
Explanation
Private loans are not traded on exchanges, so investors give up liquidity and require extra yield, often called an illiquidity premium. Daily exchange pricing is a feature of public markets. Private loans to mid-sized borrowers usually carry higher, not lower, credit risk.
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