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
Using Exhibits 1 and 2, the loss-adjusted spread advantage of Structure A over the size-weighted Structure B is closest to:
Solution
C is correct. Restating the second lien's 9.50% fixed coupon as a spread over the current 3.40% SOFR fixing gives , or 610 bps. Size-weighting the Structure B spreads across the million:
Expected credit loss is the default probability times loss severity. For the unitranche: , or 84 bps. For Structure B: bps on the first lien and bps on the second lien, weighted as
Loss-adjusted spreads are therefore bps for Structure A and bps for Structure B, an advantage of roughly 83 bps to the unitranche. The gap combines about 76 bps of stated spread with about 7 bps of lower expected loss.
Expected credit loss is the default probability times loss severity. For the unitranche: , or 84 bps. For Structure B: bps on the first lien and bps on the second lien, weighted as
Loss-adjusted spreads are therefore bps for Structure A and bps for Structure B, an advantage of roughly 83 bps to the unitranche. The gap combines about 76 bps of stated spread with about 7 bps of lower expected loss.
