Free CFA Level III: Private Markets Private Special Situations Practice Questions
Private special situations on CFA Level III cover distressed investing, activist strategies, litigation finance, royalties, and other opportunistic private market investment strategies.
Sample Questions
Question 1
Easy
A "loan-to-own" strategy in distressed investing involves:
Solution
B is correct.
In a loan-to-own strategy, the investor purchases distressed debt (typically at a significant discount to face value) with the strategic objective of becoming a majority equity owner of the reorganized company. Through the bankruptcy or restructuring process, debt claims at the fulcrum level are converted to equity. The investor's discounted purchase price effectively becomes their cost basis for the equity position.
In a loan-to-own strategy, the investor purchases distressed debt (typically at a significant discount to face value) with the strategic objective of becoming a majority equity owner of the reorganized company. Through the bankruptcy or restructuring process, debt claims at the fulcrum level are converted to equity. The investor's discounted purchase price effectively becomes their cost basis for the equity position.
Question 2
Medium
A credit bid in a bankruptcy auction allows:
Solution
B is correct.
A credit bid is a powerful tool available to secured creditors in bankruptcy auctions. It allows the secured lender to bid for the debtor's assets using the face value of their debt claim as currency, rather than cash. For example, a lender owed 100 million in secured debt can submit a credit bid of up to 100 million without spending cash. This effectively converts their debt position into an equity (ownership) position in the acquired assets. Credit bidding is a key mechanism for loan-to-own strategies.
A credit bid is a powerful tool available to secured creditors in bankruptcy auctions. It allows the secured lender to bid for the debtor's assets using the face value of their debt claim as currency, rather than cash. For example, a lender owed 100 million in secured debt can submit a credit bid of up to 100 million without spending cash. This effectively converts their debt position into an equity (ownership) position in the acquired assets. Credit bidding is a key mechanism for loan-to-own strategies.
Question 3
Hard
Alvarado executes strategy (a) by purchasing the senior unsecured notes at the market price shown in Exhibit 1. The reorganization resolves exactly as assumed in Exhibit 2 — recovery distributed in cash-equivalent value at plan confirmation in 18 months, with no interim coupons. What is the approximate annualized IRR on the trade?
Solution
B is correct. The purchase price is 48 per 100 face. The expected recovery, from the pro rata analysis of Exhibit 2, is per 100 face. The holding-period return is . Annualizing over 1.5 years gives Interim coupons are ignored, consistent with the suspension of payments during Chapter 11.