LBO Model Quiz Advanced
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1. All of the following types Explanation: The correct answer choice is A. All of the answer
of debt are typical- choices listed above with the exception of A are floating-rate debt
ly "floating-rate" instru- instruments, meaning that its interest rate is not fixed (e.g. 8% each
ments used to finance an year until maturity) but rather tied to something like LIBOR (e.g. LIBOR
LBO EXCEPT: + 3%). Both Term Loans and Revolvers have interest rates that fluctuate,
whereas subordinated notes - also referred to as high-yield debt - have
a. Subordinated Notes fixed interest rates that do not change over time.
b. Term Loan A
c. Term Loan B
d. Revolver
e. None of the above
2. Which of the answer Explanation: The correct answer choice is C. All of the answer choices
choices below lists the above represent the various tranches of LBO debt, but only answer
tranches of LBO debt choice C listed them in the correct order of lowest interest rate to highest
from Lowest to Highest interest rate. Keep in mind that both the Revolver and Term Loans
in terms of typical inter-
represent "bank debt" which is the most senior of all the debt, thereby
est rates? making it the least risky and therefore likely to have the lowest interest
rates. Revolvers typically have lower interest rates than Term Loan A
a. Term Loan B; Term because the borrowing is more temporary, and Term Loan A is typically
Loan A; Revolver; Se- lower than Term Loan B because principal repayments are higher. All
nior Notes; Subordinat- other forms of debt - senior notes, subordinated notes, Mezzanine -
ed 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
b. Revolver; Senior
to the other two, so rates tend to be lower, and Mezzanine is the most
Notes; Subordinated
junior of everything above, so interest rates (and risk) tends to be
Notes; Term Loan A;
highest there.
Term Loan B; Mezzanine
, LBO Model Quiz Advanced
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c. Revolver; Term Loan
A; Term Loan B; Se-
nior Notes; Subordinat-
ed Notes; Mezzanine
d. Revolver; Mezzanine;
Senior Notes; Subordi-
nated Notes; Term Loan
A; Term Loan B
3. Which of the follow- Explanation: PIK options do not exist for the Revolver or for Term Loans
ing Debt types is MOST because PIK always adds to the risk of the Debt, and these are the
likely to offer a Pay- least risky (and lowest potential return) forms of Debt. PIK is also
ment-in-Kind (PIK) op- extremely unlikely for Senior Notes because although they are classified
tion for the interest pay- as "High-Yield," they are still less risky than the others in this list. PIK
ments? may sometimes exist for Subordinated Notes, but remember that these
notes are still senior to Mezzanine - so PIK is definitely the most likely
a. Revolver for Mezzanine rather than the others here. In practice, PIK tends to
be most common in economic booms when financing is cheap and
b. Term Loan B
less common when financing tightens up and it gets harder to borrow
money - because it greatly increases the credit risk of the borrower.
c. Senior Notes
d. Subordinated Notes
e. Mezzanine
4. Which of the following Explanation: Remember that Maintenance Covenants mean that condi-
tranches of LBO debt be- tions like "Total Debt / EBITDA cannot exceed 4.0x" must be true, and
low have Maintenance that only "Bank Debt" uses Maintenance Covenants. So in this list, only
Covenants rather than the Revolver and Term Loans qualify as Bank Debt. All the rest (Mez-
Incurrence Covenants? zanine, Senior Notes, and Subordinated Notes) are High-Yield Debt,
which uses Incurrence Covenants rather than Maintenance Covenants.
, LBO Model Quiz Advanced
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a. Mezzanine
b. Revolver
c. Senior Notes
d. Term Loans
e. Subordinated Notes
5. Which of the following Explanation: A is false because both Subordinated Notes and Mez-
represent typical differ- zanine are "High-Yield Debt" and therefore have fixed interest rates
ences between Subordi- rather than floating interest rates. B is true because while PIK may exist
nated Notes and Mezza- for Subordinated Notes, it is much more common for Mezzanine. C is
nine? also true because since Mezzanine is considered "Equity level" in terms
of seniority, sometimes the option to receive equity in the company
a. Subordinated Notes is attached to this type of Debt. D is false because both of these are
have Unsecured, as are most forms of High- Yield Debt (with an exception
floating interest rates, for Senior Notes sometimes).
whereas Mezzanine has
a fixed interest rate
b. The PIK interest option
tends to be more com-
mon for Mezzanine
c. Mezzanine often in-
cludes an option for in-
vestors to receive war-
rants
that allow them to share
in some of the deal up-
side
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1. All of the following types Explanation: The correct answer choice is A. All of the answer
of debt are typical- choices listed above with the exception of A are floating-rate debt
ly "floating-rate" instru- instruments, meaning that its interest rate is not fixed (e.g. 8% each
ments used to finance an year until maturity) but rather tied to something like LIBOR (e.g. LIBOR
LBO EXCEPT: + 3%). Both Term Loans and Revolvers have interest rates that fluctuate,
whereas subordinated notes - also referred to as high-yield debt - have
a. Subordinated Notes fixed interest rates that do not change over time.
b. Term Loan A
c. Term Loan B
d. Revolver
e. None of the above
2. Which of the answer Explanation: The correct answer choice is C. All of the answer choices
choices below lists the above represent the various tranches of LBO debt, but only answer
tranches of LBO debt choice C listed them in the correct order of lowest interest rate to highest
from Lowest to Highest interest rate. Keep in mind that both the Revolver and Term Loans
in terms of typical inter-
represent "bank debt" which is the most senior of all the debt, thereby
est rates? making it the least risky and therefore likely to have the lowest interest
rates. Revolvers typically have lower interest rates than Term Loan A
a. Term Loan B; Term because the borrowing is more temporary, and Term Loan A is typically
Loan A; Revolver; Se- lower than Term Loan B because principal repayments are higher. All
nior Notes; Subordinat- other forms of debt - senior notes, subordinated notes, Mezzanine -
ed 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
b. Revolver; Senior
to the other two, so rates tend to be lower, and Mezzanine is the most
Notes; Subordinated
junior of everything above, so interest rates (and risk) tends to be
Notes; Term Loan A;
highest there.
Term Loan B; Mezzanine
, LBO Model Quiz Advanced
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c. Revolver; Term Loan
A; Term Loan B; Se-
nior Notes; Subordinat-
ed Notes; Mezzanine
d. Revolver; Mezzanine;
Senior Notes; Subordi-
nated Notes; Term Loan
A; Term Loan B
3. Which of the follow- Explanation: PIK options do not exist for the Revolver or for Term Loans
ing Debt types is MOST because PIK always adds to the risk of the Debt, and these are the
likely to offer a Pay- least risky (and lowest potential return) forms of Debt. PIK is also
ment-in-Kind (PIK) op- extremely unlikely for Senior Notes because although they are classified
tion for the interest pay- as "High-Yield," they are still less risky than the others in this list. PIK
ments? may sometimes exist for Subordinated Notes, but remember that these
notes are still senior to Mezzanine - so PIK is definitely the most likely
a. Revolver for Mezzanine rather than the others here. In practice, PIK tends to
be most common in economic booms when financing is cheap and
b. Term Loan B
less common when financing tightens up and it gets harder to borrow
money - because it greatly increases the credit risk of the borrower.
c. Senior Notes
d. Subordinated Notes
e. Mezzanine
4. Which of the following Explanation: Remember that Maintenance Covenants mean that condi-
tranches of LBO debt be- tions like "Total Debt / EBITDA cannot exceed 4.0x" must be true, and
low have Maintenance that only "Bank Debt" uses Maintenance Covenants. So in this list, only
Covenants rather than the Revolver and Term Loans qualify as Bank Debt. All the rest (Mez-
Incurrence Covenants? zanine, Senior Notes, and Subordinated Notes) are High-Yield Debt,
which uses Incurrence Covenants rather than Maintenance Covenants.
, LBO Model Quiz Advanced
Study online at https://quizlet.com/_3k09ji
a. Mezzanine
b. Revolver
c. Senior Notes
d. Term Loans
e. Subordinated Notes
5. Which of the following Explanation: A is false because both Subordinated Notes and Mez-
represent typical differ- zanine are "High-Yield Debt" and therefore have fixed interest rates
ences between Subordi- rather than floating interest rates. B is true because while PIK may exist
nated Notes and Mezza- for Subordinated Notes, it is much more common for Mezzanine. C is
nine? also true because since Mezzanine is considered "Equity level" in terms
of seniority, sometimes the option to receive equity in the company
a. Subordinated Notes is attached to this type of Debt. D is false because both of these are
have Unsecured, as are most forms of High- Yield Debt (with an exception
floating interest rates, for Senior Notes sometimes).
whereas Mezzanine has
a fixed interest rate
b. The PIK interest option
tends to be more com-
mon for Mezzanine
c. Mezzanine often in-
cludes an option for in-
vestors to receive war-
rants
that allow them to share
in some of the deal up-
side
