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LBO Model Quiz Advanced 2023/2024 already graded A+
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LBO Model Quiz Advanced 2023/2024 already graded A+
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LBO Model Quiz AdvancedAll of the following types of debt are typically "floating-rate" instruments used to finance an LBO
EXCEPT:
a. Subordinated Notes
b. Term Loan A
c. Term Loan B
d. Revolver
e. None of the above - ANSExplanation: The correct answer choice is A. All of the answer
choices listed above with the exception of A are floating-rate debt instruments, meaning that its
interest rate is not fixed (e.g. 8% each year until maturity) but rather tied to something like
LIBOR (e.g. LIBOR + 3%). Both Term Loans and Revolvers have interest rates that fluctuate,
whereas subordinated notes - also referred to as high-yield debt - have fixed interest rates that
do not change over time.
Which of the answer choices below lists the tranches of LBO debt from Lowest to Highest in
terms of typical interest rates?
a. Term Loan B; Term Loan A; Revolver; Senior Notes; Subordinated Notes; Mezzanine
b. Revolver; Senior Notes; Subordinated Notes; Term Loan A; Term Loan B; Mezzanine
c. Revolver; Term Loan A; Term Loan B; Senior Notes; Subordinated Notes; Mezzanine
d. Revolver; Mezzanine; Senior Notes; Subordinated Notes; Term Loan A; Term Loan B -
ANSExplanation: The correct answer choice is C. All of the answer choices above represent the
various tranches of LBO debt, but only answer choice C listed them in the correct order of
lowest interest rate to highest interest rate. Keep in mind that both the Revolver and Term Loans
represent "bank debt" which is the most senior of all the debt, thereby making it the least risky
and therefore likely to have the lowest interest rates. Revolvers typically have lower interest
rates than Term Loan A because the borrowing is more temporary, and Term Loan A is typically
lower than Term Loan B because principal repayments are higher. All other forms of debt -
senior notes, subordinated notes, Mezzanine - represent the "high- yield" type debt which is
riskier than bank debt and therefore offers a higher yield to investors. Senior Notes are senior to
the other two, so rates tend to be lower, and Mezzanine is the most junior of everything above,
so interest rates (and risk) tends to be highest there.
, Which of the following Debt types is MOST likely to offer a Payment-in-Kind (PIK) option for the
interest payments?
a. Revolver
b. Term Loan B
c. Senior Notes
d. Subordinated Notes
e. Mezzanine - ANSExplanation: PIK options do not exist for the Revolver or for Term Loans
because PIK always adds to the risk of the Debt, and these are the least risky (and lowest
potential return) forms of Debt. PIK is also extremely unlikely for Senior Notes because although
they are classified as "High-Yield," they are still less risky than the others in this list. PIK may
sometimes exist for Subordinated Notes, but remember that these notes are still senior to
Mezzanine - so PIK is definitely the most likely for Mezzanine rather than the others here. In
practice, PIK tends to be most common in economic booms when financing is cheap and less
common when financing tightens up and it gets harder to borrow money - because it greatly
increases the credit risk of the borrower.
Which of the following tranches of LBO debt below have Maintenance Covenants rather than
Incurrence Covenants?
a. Mezzanine
b. Revolver
c. Senior Notes
d. Term Loans
e. Subordinated Notes - ANSExplanation: Remember that Maintenance Covenants mean that
conditions like "Total Debt / EBITDA cannot exceed 4.0x" must be true, and that only "Bank
Debt" uses Maintenance Covenants. So in this list, only the Revolver and Term Loans qualify as
Bank Debt. All the rest (Mezzanine, Senior Notes, and Subordinated Notes) are High-Yield
Debt, which uses Incurrence Covenants rather than Maintenance Covenants.
Which of the following represent typical differences between Subordinated Notes and
Mezzanine?
a. Subordinated Notes have
floating interest rates, whereas Mezzanine has a fixed interest rate
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