FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit
Which feature of most private credit loans makes borrowers particularly sensitive to rising policy rates?
Private credit loans are mostly floating rate, priced at a reference rate plus a spread, and borrowers are often highly leveraged. Rising policy rates therefore quickly raise interest costs and weaken coverage ratios, increasing default risk.
- AFixed coupons set at origination for the full term
- BFloating rates tied to a reference rate plus a spread, with borrowers often highly leveragedCorrect
- CZero coupon structures with no interest payments
- DGovernment guarantees on principal
Explanation
Most direct loans are floating rate, so higher reference rates raise borrower interest costs, and high leverage amplifies the effect on interest coverage. Fixed coupons, zero coupons or guarantees would not create this sensitivity.
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