LBO MODEL QUIZ ADVANCED
QUESTIONS & ANSWERS| GRADE A|
100% CORRECT (VERIFIED SOLUTIONS)
, All 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 - ANSWERExplanation: 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
- ANSWERExplanation: 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.
QUESTIONS & ANSWERS| GRADE A|
100% CORRECT (VERIFIED SOLUTIONS)
, All 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 - ANSWERExplanation: 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
- ANSWERExplanation: 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.
