A $100 PIK note with 10% rate compounds to year 5. What is the approximate balance at year 5?

Study for the Private Equity Interview Test. Prepare with a range of questions and expert explanations to ensure success in landing your dream role. Optimize your readiness for the interview process!

Multiple Choice

A $100 PIK note with 10% rate compounds to year 5. What is the approximate balance at year 5?

Explanation:
Interest that is paid in kind accumulates and is added to the outstanding balance, so the amount owed grows each year at the coupon rate. With a 10% rate, the balance after five years is 100 × (1.10)^5. Calculating step by step: 1.1^2 = 1.21, 1.1^3 = 1.331, 1.1^4 = 1.4641, 1.1^5 ≈ 1.61051. So 100 × 1.61051 ≈ 161.05, i.e., about $161. This is closest to $160, so the best approximate balance is around $160.

Interest that is paid in kind accumulates and is added to the outstanding balance, so the amount owed grows each year at the coupon rate. With a 10% rate, the balance after five years is 100 × (1.10)^5. Calculating step by step: 1.1^2 = 1.21, 1.1^3 = 1.331, 1.1^4 = 1.4641, 1.1^5 ≈ 1.61051. So 100 × 1.61051 ≈ 161.05, i.e., about $161. This is closest to $160, so the best approximate balance is around $160.

More Multiple Choice Questions
Subscribe

Get the latest from Passetra

You can unsubscribe at any time. Read our privacy policy