CLFP Lease Structuring & Pricing

Question 1

What is the 'implicit rate' (or lessor's rate) in a lease transaction?

Accepted Answer

The internal rate of return that equates the present value of all lease payments and residual value to the equipment's fair value

Answer

The implicit rate is the lessor's yield on the transaction, calculated as the IRR that discounts all cash inflows (payments + residual + tax benefits) back to the equipment cost.

Question 2

How does a higher assumed residual value affect the lessee's periodic lease payment?

Accepted Answer

It lowers the periodic payment because less of the equipment cost needs to be recovered through payments

Answer

When the lessor assumes a higher residual, less cost must be recovered through rent, allowing lower periodic payments—this is how fair market value leases achieve lower payments than $1 buyout leases.

Question 3

What is a 'flat payment' (level payment) lease structure?

Accepted Answer

A lease with equal periodic payments throughout the term, making budgeting easy for the lessee

Answer

A flat or level payment structure maintains the same payment amount each period, which simplifies lessee budgeting and is the most common payment structure in equipment leasing.

Question 4

What is a 'skip payment' lease structure?

Accepted Answer

A structure where certain periods (often seasonal months) have no payment due, accommodating businesses with seasonal cash flows

Answer

Skip payment leases omit rent in specified months (e.g., no payments in January and February for a seasonal business), aligning obligations with the lessee's revenue cycle.

Question 5

What is 'yield' in the context of equipment lease pricing?

Accepted Answer

The internal rate of return (IRR) the lessor earns on its investment, considering all cash flows including tax benefits

Answer

Yield is the lessor's after-tax or pre-tax IRR, calculated from all cash flows: equipment cost, lease payments, residual value, tax benefits, and funding costs.

CLFP - Certified Lease & Finance Professional Practice Test

CLFP - Certified Lease & Finance Professional Practice Test

CLFP Lease Structuring & Pricing