WALL STREET PREP END OF COURSE EXAM QUESTIONS
AND ANSWERS MARKED A+
✔✔What's the difference between 1st and 2nd lien? - ✔✔2nd lien has a junior claim on
assets (behind 1st)
✔✔What are high-yield bonds? - ✔✔Speculative-grade ("junk") bonds with fixed coupon
rates
✔✔Why are loans repaid before bonds? - ✔✔They are secured by collateral
✔✔What is the most common LBO debt package? - ✔✔Institutional (non-bank) term
loan B/C/D plus revolver
✔✔How long are term loans B/C/D? - ✔✔Typically 5-8 years with looser covenants and
less amortization
✔✔What are common loan rules? - ✔✔Priced at SOFR + spread, scheduled
amortizations, no call protection
✔✔What's the difference between Term Loan A and B/C/D? - ✔✔Loan A comes from
banks (5-year 1st lien)
✔✔B/C/D from institutional investors - ✔✔
✔✔What are revolvers? - ✔✔Credit lines tied to borrowing base (A/R & inventory),
secured 1st lien at SOFR + spread
✔✔Who are 2nd-lien loan investors? - ✔✔CLO funds and institutional investors
✔✔Are 2nd-lien holders above bondholders? - ✔✔Yes — they have secured claims
✔✔What does "high-yield bond" apply to? - ✔✔Debt rated BBB- or worse that allows
higher leverage than banks permit
✔✔What is investment-grade debt? - ✔✔Rating above BBB (or Baa for Moody's)
✔✔Are HYBs secured or unsecured? - ✔✔Usually unsecured
✔✔Are HYBs SEC-registered? - ✔✔Initially no — issued under Rule 144A, then
exchanged later for registered debt
✔✔What are covenants? - ✔✔Lender-imposed restrictions (e.g., financial ratios, debt
limits, pledge clauses)
, ✔✔What's the difference between maintenance and incurrence covenants? -
✔✔Maintenance = ongoing quarterly tests
✔✔incurrence = triggered by specific actions (new debt - ✔✔dividends, M&A)
✔✔Which covenant type is more common today? - ✔✔Incurrence ("covenant-lite")
✔✔What is mezzanine financing? - ✔✔Subordinated capital between debt and equity,
riskier than HYBs but higher return
✔✔What are examples of mezzanine securities? - ✔✔Convertible debt, bonds with
warrants, convertible preferred stock, preferred with warrants, unsecured notes
✔✔What are mezzanine returns made of? - ✔✔Cash interest/dividends, PIK
interest/dividends, and warrants ("equity kicker")
✔✔Who invests in mezzanine loans? - ✔✔Hedge funds and mezz funds
✔✔What are bridge loans? - ✔✔Temporary loans used until permanent financing is in
place, often by investment banks
✔✔Why is "dry powder" not a good thing? - ✔✔It means investors aren't earning returns
on idle capital
✔✔What is the structure of a PE fund? - ✔✔GPs manage the fund and take 15-20%
carry
✔✔LPs supply 80% of capital and returns - ✔✔
✔✔What are GPs and LPs? - ✔✔GPs (general partners) are managers
✔✔LPs (limited partners) are investors - ✔✔
✔✔How are PE firms organized? - ✔✔Typically limited partnerships (LPs)
✔✔How are PE funds structured? - ✔✔Also as limited partnerships
✔✔How are portfolio companies structured? - ✔✔Usually as pass-through partnerships
(though some C-corps fall under the fund)
✔✔What is the 20% QBI deduction? - ✔✔Tax deduction for pass-through income (does
not apply to all)
AND ANSWERS MARKED A+
✔✔What's the difference between 1st and 2nd lien? - ✔✔2nd lien has a junior claim on
assets (behind 1st)
✔✔What are high-yield bonds? - ✔✔Speculative-grade ("junk") bonds with fixed coupon
rates
✔✔Why are loans repaid before bonds? - ✔✔They are secured by collateral
✔✔What is the most common LBO debt package? - ✔✔Institutional (non-bank) term
loan B/C/D plus revolver
✔✔How long are term loans B/C/D? - ✔✔Typically 5-8 years with looser covenants and
less amortization
✔✔What are common loan rules? - ✔✔Priced at SOFR + spread, scheduled
amortizations, no call protection
✔✔What's the difference between Term Loan A and B/C/D? - ✔✔Loan A comes from
banks (5-year 1st lien)
✔✔B/C/D from institutional investors - ✔✔
✔✔What are revolvers? - ✔✔Credit lines tied to borrowing base (A/R & inventory),
secured 1st lien at SOFR + spread
✔✔Who are 2nd-lien loan investors? - ✔✔CLO funds and institutional investors
✔✔Are 2nd-lien holders above bondholders? - ✔✔Yes — they have secured claims
✔✔What does "high-yield bond" apply to? - ✔✔Debt rated BBB- or worse that allows
higher leverage than banks permit
✔✔What is investment-grade debt? - ✔✔Rating above BBB (or Baa for Moody's)
✔✔Are HYBs secured or unsecured? - ✔✔Usually unsecured
✔✔Are HYBs SEC-registered? - ✔✔Initially no — issued under Rule 144A, then
exchanged later for registered debt
✔✔What are covenants? - ✔✔Lender-imposed restrictions (e.g., financial ratios, debt
limits, pledge clauses)
, ✔✔What's the difference between maintenance and incurrence covenants? -
✔✔Maintenance = ongoing quarterly tests
✔✔incurrence = triggered by specific actions (new debt - ✔✔dividends, M&A)
✔✔Which covenant type is more common today? - ✔✔Incurrence ("covenant-lite")
✔✔What is mezzanine financing? - ✔✔Subordinated capital between debt and equity,
riskier than HYBs but higher return
✔✔What are examples of mezzanine securities? - ✔✔Convertible debt, bonds with
warrants, convertible preferred stock, preferred with warrants, unsecured notes
✔✔What are mezzanine returns made of? - ✔✔Cash interest/dividends, PIK
interest/dividends, and warrants ("equity kicker")
✔✔Who invests in mezzanine loans? - ✔✔Hedge funds and mezz funds
✔✔What are bridge loans? - ✔✔Temporary loans used until permanent financing is in
place, often by investment banks
✔✔Why is "dry powder" not a good thing? - ✔✔It means investors aren't earning returns
on idle capital
✔✔What is the structure of a PE fund? - ✔✔GPs manage the fund and take 15-20%
carry
✔✔LPs supply 80% of capital and returns - ✔✔
✔✔What are GPs and LPs? - ✔✔GPs (general partners) are managers
✔✔LPs (limited partners) are investors - ✔✔
✔✔How are PE firms organized? - ✔✔Typically limited partnerships (LPs)
✔✔How are PE funds structured? - ✔✔Also as limited partnerships
✔✔How are portfolio companies structured? - ✔✔Usually as pass-through partnerships
(though some C-corps fall under the fund)
✔✔What is the 20% QBI deduction? - ✔✔Tax deduction for pass-through income (does
not apply to all)
