Exam

Final exam

20 questions · pass mark 70%

This exam covers all six modules of the course. It has 20 questions, some of which need a calculation, so have a calculator ready. You need 70% to pass, and you can retake it.

All names and figures are illustrative.

Answer every question, then check your answers. The pass mark is 70%.

Question 1 of 20

What does a private equity sponsor commonly bring to a direct lender that a family-owned borrower usually doesn't?

A A guarantee that the sponsor will repay the loan if the company can't B A large equity cushion below the loan and a steady flow of repeat deals C A public credit rating that makes the loan easier to sell D An exemption from covenants, since the sponsor monitors the company

Question 2 of 20

An $80m unitranche is priced at SOFR + 575 bps. Under an agreement among lenders, a bank takes a $20m first-out piece at SOFR + 275 bps. What spread does the $60m last-out piece earn?

A SOFR + 575 bps B SOFR + 875 bps C SOFR + 625 bps D SOFR + 675 bps

Question 3 of 20

As borrowers get larger, which change is commonly seen in direct lending?

A More competition from the broadly syndicated market, which can mean lower spreads and looser terms B Stricter covenants, because larger companies are riskier than smaller ones C Fewer lenders per deal, because larger loans are usually held by one lender D Higher spreads, because larger loans are harder to diversify

Question 4 of 20

Which statement best describes the difference between second lien and mezzanine debt?

A Mezzanine is secured on the same collateral as the first lien and paid at the same time B Second lien is usually unsecured and pays only PIK interest C Second lien is secured but ranks behind the first lien; mezzanine is usually unsecured and subordinated D They're the same thing: both names describe any loan below senior debt

Question 5 of 20

A $40m holdco PIK note accrues 12% a year, compounding annually, with no cash interest. How much is owed after 3 years?

A $54.4m B $44.8m C $56.2m D $52.0m

Question 6 of 20

What does structural subordination mean for a holdco lender?

A It is repaid only from value left after the operating company's creditors have been paid B It has agreed in its contract to rank behind the senior lenders at the same company C It shares the operating company's collateral equally with the senior lenders D It ranks ahead of the operating company's lenders because it lends to the parent

Question 7 of 20

A distressed fund buys $20m face value of a defaulted loan at 50. A year later the loan recovers 65. What are the gain and the multiple on the fund's cost?

A A $13.0m gain and 2.30x B A $3.0m gain and 1.15x C A $1.5m gain and 1.15x D A $3.0m gain and 1.30x

Question 8 of 20

Why are rescue financings commonly expensive, with tight lender protections?

A Because regulators set a minimum price for loans to troubled companies B Because the company has few alternatives and the lender is backing a turnaround with little room for error C Because rescue loans are always unsecured and rank behind all other debt D Because rescue lenders must hold the loan for at least ten years

Question 9 of 20

A distributor has $50m of receivables ($6m ineligible) at an 85% advance rate, $24m of eligible inventory at net orderly liquidation value at 75%, and $1.4m of reserves. Its ABL commitment is $50m and $41m is drawn. How much more can it borrow?

A $9.0m B $13.0m C $54.0m D $7.6m

Question 10 of 20

In an asset-backed finance deal, what does the first-loss equity do?

A It earns a fixed coupon ahead of the senior lender B It guarantees the originator's servicing performance C It absorbs losses on the pool before the senior lender loses principal D It can be sold back to the originator at par whenever losses rise

Question 11 of 20

A venture lender is considering a loan to a company that isn't yet profitable. What does the lender commonly rely on most?

A The company's current EBITDA and leverage ratio B The company's cash runway and its ability to raise more equity from strong investors C A mortgage over the company's offices and equipment D A guarantee from the company's venture investors

Question 12 of 20

What do niche strategies such as litigation finance and trade finance commonly have in common?

A They're traded on exchanges, so prices are easy to observe B They're always senior secured loans to large companies C Their returns move closely with the broad stock market D They need specialist underwriting and carry risks that are hard to diversify or value

Question 13 of 20

An apartment building worth $80m has net operating income of $4.68m. It has a $52m senior mortgage. What are the senior loan's debt yield and loan-to-value?

A Debt yield 5.85%, LTV 65% B Debt yield 9.0%, LTV 35% C Debt yield 11.1%, LTV 65% D Debt yield 9.0%, LTV 65%

Question 14 of 20

What is a bridge loan in real estate lending?

A A long-term loan on a fully leased, stable property B Short-term financing for a property being leased up or renovated C A loan secured by the owner's shares in a listed property company D A loan that connects two lenders' mortgages on the same building

Question 15 of 20

An infrastructure project has cash flow available for debt service of $15.0m and debt service of $12.0m. What is its DSCR, and how far can its cash flow fall before a 1.10x lock-up?

A 0.80x, and it can fall 12% B 1.25x, and it can fall 25% C 1.25x, and it can fall 12% D 1.20x, and it can fall 10%

Question 16 of 20

A fund's included investors have $400m of uncalled commitments at a 90% advance rate and its designated investors have $150m at 60%. The subscription line is sized at $300m. How much can the fund borrow?

A $300m B $450m C $360m D $495m

Question 17 of 20

Why can using a subscription line raise a fund's IRR while lowering its multiple?

A Because the lender shares in the fund's profits, reducing the multiple, while fees fall B Because the line lets the fund invest in more deals than LPs committed to C Because LPs' capital is called later, shortening the time it's invested, while interest on the line reduces total profit D Because IRR is calculated before interest and the multiple after it, so they always move in opposite directions

Question 18 of 20

A buyout fund borrows against its portfolio to pay LPs a distribution. Which concern do LPs commonly raise?

A The loan is secured by LPs' uncalled commitments, so LPs may be asked for more capital B The loan must be repaid by the fund's lenders if the portfolio falls in value C The distribution is taxed twice because it comes from borrowed money D It can lift IRR and bring carry forward while adding risk and lowering the multiple

Question 19 of 20

Using loss rate = default rate × (1 − recovery rate), what is the expected annual loss on a loan book with a 3% default rate and a 45% recovery rate?

A 1.65% B 1.35% C 3.00% D 0.45%

Question 20 of 20

An allocation's blended expected return after losses is about 9.3% in an average year. Why might it deliver noticeably less in a recession?

A Because yields on floating-rate loans always fall to zero in a recession B Because defaults tend to rise and recoveries fall across strategies at the same time, and fees still come out C Because blended averages are only valid for single-strategy portfolios D Because illiquid strategies must be sold at the start of a recession