Leveraged Finance Interview Technical
Questions and Answers | Latest
Version | 2025/2026 | Correct & Verified
What is leveraged finance?
✔✔ Financing that uses a high level of debt relative to equity, often for acquisitions or
recapitalizations
What types of companies typically use leveraged finance?
✔✔ Companies with stable cash flows and predictable earnings
What is an LBO?
✔✔ A leveraged buyout where a company is acquired using significant debt
Why do private equity firms use leverage?
✔✔ To amplify equity returns
What is the main source of debt repayment in leveraged finance?
✔✔ Operating cash flow
What does EBITDA stand for?
✔✔ Earnings before interest, taxes, depreciation, and amortization
1
,Why is EBITDA important in leveraged finance?
✔✔ It approximates cash flow used to service debt
What is leverage ratio?
✔✔ Total debt divided by EBITDA
What is a typical leverage multiple in LBOs?
✔✔ Around 4x–7x EBITDA, depending on market conditions
What is senior debt?
✔✔ Debt with the highest priority in repayment
What is subordinated debt?
✔✔ Debt that ranks below senior debt in repayment priority
What is mezzanine debt?
✔✔ Hybrid debt with higher interest and often equity features
What is unitranche debt?
✔✔ A single debt facility combining senior and subordinated debt
Why is unitranche attractive to borrowers?
2
,✔✔ Simpler structure and faster execution
What is a covenant?
✔✔ A contractual restriction or requirement imposed on borrowers
What is a maintenance covenant?
✔✔ A financial test that must be met regularly
What is an incurrence covenant?
✔✔ A test triggered only when taking specific actions
What is covenant-lite debt?
✔✔ Debt with minimal or no maintenance covenants
Why has covenant-lite become popular?
✔✔ Strong credit markets and investor demand
What is cash interest?
✔✔ Interest paid in cash periodically
What is PIK interest?
✔✔ Interest paid by adding to the principal balance
3
, Why do lenders charge higher rates on PIK debt?
✔✔ Increased risk due to deferred cash payments
What is a credit spread?
✔✔ The interest margin over a benchmark rate
What benchmarks are commonly used in leveraged loans?
✔✔ SOFR or EURIBOR
What is amortization?
✔✔ Scheduled repayment of principal over time
Why do lenders prefer amortization?
✔✔ It reduces credit risk over time
What is bullet repayment?
✔✔ Principal repaid in full at maturity
What is free cash flow?
✔✔ Cash remaining after operating expenses and capital expenditures
4
Questions and Answers | Latest
Version | 2025/2026 | Correct & Verified
What is leveraged finance?
✔✔ Financing that uses a high level of debt relative to equity, often for acquisitions or
recapitalizations
What types of companies typically use leveraged finance?
✔✔ Companies with stable cash flows and predictable earnings
What is an LBO?
✔✔ A leveraged buyout where a company is acquired using significant debt
Why do private equity firms use leverage?
✔✔ To amplify equity returns
What is the main source of debt repayment in leveraged finance?
✔✔ Operating cash flow
What does EBITDA stand for?
✔✔ Earnings before interest, taxes, depreciation, and amortization
1
,Why is EBITDA important in leveraged finance?
✔✔ It approximates cash flow used to service debt
What is leverage ratio?
✔✔ Total debt divided by EBITDA
What is a typical leverage multiple in LBOs?
✔✔ Around 4x–7x EBITDA, depending on market conditions
What is senior debt?
✔✔ Debt with the highest priority in repayment
What is subordinated debt?
✔✔ Debt that ranks below senior debt in repayment priority
What is mezzanine debt?
✔✔ Hybrid debt with higher interest and often equity features
What is unitranche debt?
✔✔ A single debt facility combining senior and subordinated debt
Why is unitranche attractive to borrowers?
2
,✔✔ Simpler structure and faster execution
What is a covenant?
✔✔ A contractual restriction or requirement imposed on borrowers
What is a maintenance covenant?
✔✔ A financial test that must be met regularly
What is an incurrence covenant?
✔✔ A test triggered only when taking specific actions
What is covenant-lite debt?
✔✔ Debt with minimal or no maintenance covenants
Why has covenant-lite become popular?
✔✔ Strong credit markets and investor demand
What is cash interest?
✔✔ Interest paid in cash periodically
What is PIK interest?
✔✔ Interest paid by adding to the principal balance
3
, Why do lenders charge higher rates on PIK debt?
✔✔ Increased risk due to deferred cash payments
What is a credit spread?
✔✔ The interest margin over a benchmark rate
What benchmarks are commonly used in leveraged loans?
✔✔ SOFR or EURIBOR
What is amortization?
✔✔ Scheduled repayment of principal over time
Why do lenders prefer amortization?
✔✔ It reduces credit risk over time
What is bullet repayment?
✔✔ Principal repaid in full at maturity
What is free cash flow?
✔✔ Cash remaining after operating expenses and capital expenditures
4
