06 13 LBO Model Quiz Questions Advanced
Investment Banking Interview Guide
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Investment Banking Interview Guide, Advanced LBO Model – Quiz Questions
Answers in bold.
Table of Contents:
•
•
•
Types of Debt and Financing Methods
Financial Statement Adjustments and Debt Schedules
Calculating Returns
Types of Debt and Financing Methods
1. 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
i. Explanation: 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. 2. 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
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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
i. Explanation: 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
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Investment Banking Interview Guide, Advanced LBO Model – Quiz Questions
Answers in bold.
Table of Contents:
•
•
•
Types of Debt and Financing Methods
Financial Statement Adjustments and Debt Schedules
Calculating Returns
Types of Debt and Financing Methods
1. 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
i. Explanation: 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. 2. 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
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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
i. Explanation: 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