hard · Private Credit & Debt loan-structures-instruments

For a 3-year expected life, which factor will cause the realized gross IRR to a hold-to-maturity lender to DIVERGE MOST from a naive 'coupon + amortized OID + amortized fee' yield-to-maturity quote, assuming no default?

1. The SOFR floor binding above current SOFR, which raises every coupon above the indexed rate until SOFR exceeds 1.00% and is the single largest source of additional yield over the index
2. The reinvestment assumption embedded in IRR, since YTM and IRR treat interim coupon reinvestment identically and therefore cannot diverge on a floating-rate loan
3. The OID being quoted as a percentage of face rather than of funded amount, which understates the discount's yield contribution by roughly 200 basis points
4. The amortization of the upfront fee over expected life rather than stated maturity, which is immaterial because the fee is earned at close regardless of prepayment timing

Sign up free to see the explanation and track your rank →