Advanced LBO Modeling Challenge Questions and Answers Verified and Updated 2026.docx

Advanced LBO
Modeling Challenge
Questions and Answers
Verified and Updated
2026

, All of the following types of debt are typically "floating-rate" instruments used to finance an
k k k k k k k k k k k k k k k




LBO EXCEPT: k




a. Subordinated Notes
k k




b. Term Loan A
k k k




c. Term Loan B
k k k




d. Revolver
k




e. None of the above - correct answerExplanation: The correct answer choice is A. All of the
k k k k k k k k k k k k k k k k k




answer
choices listed above with the exception of A are floating-rate debt instruments, meaning that
k k k k k k k k k k k k k k




its interest rate is not fixed (e.g. 8% each year until maturity) but rather tied to something like
k k k k k k k k k k k k k k k k k k




LIBOR (e.g. LIBOR + 3%). Both Term Loans and Revolvers have interest rates that fluctuate,
k k k k k k k k k k k k k k k




whereas subordinated notes - also referred to as high-yield debt - have fixed interest rates that
k k k k k k k k k k k k k k k k




do not change over time.
k k k k




Which of the answer choices below lists the tranches of LBO debt from Lowest to Highest in
k k k k k k k k k k k k k k k k k




terms of typical interest rates? k k k k




a. Term Loan B; Term Loan A; Revolver; Senior Notes; Subordinated Notes; Mezzanine
k k k k k k k k k k k k




b. Revolver; Senior Notes; Subordinated Notes; Term Loan A; Term Loan B; Mezzanine
k k k k k k k k k k k k




c. Revolver; Term Loan A; Term Loan B; Senior Notes; Subordinated Notes; Mezzanine
k k k k k k k k k k k k




d. Revolver; Mezzanine; Senior Notes; Subordinated Notes; Term Loan A; Term Loan B -
k k k k k k k k k k k k k k




correct answerExplanation: The correct answer choice is C. All of the answer choices above
k k k k k k k k k k k k k k




represent the various tranches of LBO debt, but only answer choice C listed them in the correct k k k k k k k k k k k k k k k k




order of lowest interest rate to highest interest rate. Keep in mind that both the Revolver and
k k k k k k k k k k k k k k k k k k




Term Loans represent "bank debt" which is the most senior of all the debt, thereby making it
k k k k k k k k k k k k k k k k k




the least risky and therefore likely to have the lowest interest rates. Revolvers typically have
k k k k k k k k k k k k k k k




lower interest rates than Term Loan A because the borrowing is more temporary, and Term
k k k k k k k k k k k k k k k




Loan A is typically lower than Term Loan B because principal repayments are higher. All other
k k k k k k k k k k k k k k k k




forms of debt - senior notes, subordinated notes, Mezzanine - represent the "high- yield" type
k k k k k k k k k k k k k k k




debt which is riskier than bank debt and therefore offers a higher yield to investors. Senior
k k k k k k k k k k k k k k k k




Notes are senior to the other two, so rates tend to be lower, and Mezzanine is the most junior of
k k k k k k k k k k k k k k k k k k k k




everything above, so interest rates (and risk) tends to be highest there. k k k k k k k k k k k




Which of the following Debt types is MOST likely to offer a Payment-in-Kind (PIK) option for the
k k k k k k k k k k k k k k k k




interest payments?
k k




a. Revolver
k