Chartered Alternative Investment Analyst Association (CAIA) Exam 2025 – 400 Free Practice Questions to Pass the Exam

To determine the interest coverage ratio, you first need to calculate the annual interest payment on the commercial mortgage. The interest-only loan amount is $450,000, and the interest rate is 7.25%.

The calculation for the annual interest payment is as follows:

Annual Interest Payment = Loan Amount × Interest Rate

Annual Interest Payment = $450,000 × 0.0725 = $32,625

Now, to find the interest coverage ratio, you divide the net operating income (NOI) by the annual interest payment:

Interest Coverage Ratio = Net Operating Income / Annual Interest Payment

Interest Coverage Ratio = $93,000 / $32,625 ≈ 2.85

This result indicates that the property's net operating income is 2.85 times greater than the interest expense, suggesting a relatively comfortable ability to cover its interest obligations. A ratio above 1 implies that the property generates enough income to cover its interest payments, which is a key indicator of financial health in real estate investments.

The answer of 2.85 is correct because it accurately represents the calculation and demonstrates a positive financial metric regarding the property's ability to service its debt.