Sample Questions
Question 1
Easy
Mezzanine debt is most accurately characterized as:
Solution
B is correct.
Mezzanine debt occupies a middle position in the capital structure — below senior debt but above equity. It is typically unsecured and subordinated, meaning senior lenders are repaid first in a default scenario. To compensate for the higher risk, mezzanine debt carries higher yields (typically 12-20% total return including cash interest and payment-in-kind interest) and often includes equity upside participation through warrants or equity conversion features.
Mezzanine debt occupies a middle position in the capital structure — below senior debt but above equity. It is typically unsecured and subordinated, meaning senior lenders are repaid first in a default scenario. To compensate for the higher risk, mezzanine debt carries higher yields (typically 12-20% total return including cash interest and payment-in-kind interest) and often includes equity upside participation through warrants or equity conversion features.
Question 2
Medium
Venture debt is most appropriately described as:
Solution
A is correct.
Venture debt is a specialized form of debt financing provided to VC-backed startups, typically as a complement to equity rounds. It extends the startup's runway without additional dilution. Venture debt often includes warrant coverage (giving the lender equity upside), milestone-based drawdown provisions, and is typically secured by the company's assets. It is most commonly provided by specialized lenders (e.g., Silicon Valley Bank, WTI) and is sized at 25-50% of the most recent equity round.
Venture debt is a specialized form of debt financing provided to VC-backed startups, typically as a complement to equity rounds. It extends the startup's runway without additional dilution. Venture debt often includes warrant coverage (giving the lender equity upside), milestone-based drawdown provisions, and is typically secured by the company's assets. It is most commonly provided by specialized lenders (e.g., Silicon Valley Bank, WTI) and is sized at 25-50% of the most recent equity round.
Question 3
Hard
Assume the sponsor refinances the facility at the end of year 2, triggering the year-2 call premium in Exhibit 1. Annual interest is paid at the end of each year and the loan is funded at par less OID. The realized IRR to Northbridge is closest to:
Solution
A is correct.
Realized IRR on a callable OID note: lender's cash flows are net proceeds at issuance (par less OID), annual cash coupons, and a call-date repayment of principal at the call price plus the final coupon. Solve for the rate that sets PV of inflows equal to the outflow.
| Item | Amount | Why |
|---|---|---|
| Net proceeds at | ($343M) | ; par less 2.00% OID |
| Year-1 coupon | +$38.5M | |
| Year-2 coupon | +$38.5M | |
| Year-2 call repayment | +$353.5M | ; principal at 101 call price |
| Year-2 total inflow | +$392M | $38.5M coupon + $353.5M call repayment |
| **Realized IRR** | **12.66%** | Solves |
The lift over the 11.33% hold-to-maturity yield reflects OID accretion compressed into 2 years plus the 1% call premium.
Realized IRR on a callable OID note: lender's cash flows are net proceeds at issuance (par less OID), annual cash coupons, and a call-date repayment of principal at the call price plus the final coupon. Solve for the rate that sets PV of inflows equal to the outflow.
| Item | Amount | Why |
|---|---|---|
| Net proceeds at | ($343M) | ; par less 2.00% OID |
| Year-1 coupon | +$38.5M | |
| Year-2 coupon | +$38.5M | |
| Year-2 call repayment | +$353.5M | ; principal at 101 call price |
| Year-2 total inflow | +$392M | $38.5M coupon + $353.5M call repayment |
| **Realized IRR** | **12.66%** | Solves |
The lift over the 11.33% hold-to-maturity yield reflects OID accretion compressed into 2 years plus the 1% call premium.
