Interesting Interview Question (Private Credit)
Hey all -
Came across a very interesting question in one of my interviews and thought I would share it as it was quite thought provoking. I will answer the question after enough people have had the opportunity to attempt... Good Luck!
You own a loan of 100 with a coupon of 10%. You then lever this loan and get an advance rate of 60% with interest of 6%. What is the Yield to Equity?
16%
You have to put in $40 of equity, which at 10% gives you $4 per year.
The lender puts in $60, which you use to generate $6 at the 10% rate. However, you owe the lender 6% interest ($3.6) which leaves $2.4 for you.
Added together your $40 generated $6.4, a 16% return.
thanks for confirming, also got 16%
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