Reading 55: LOS b ～ Q11－15

11．Which of the following criteria assesses the ability of the issuer to repay its obligations?

A)   Commitment.

B)   Capacity.

C)   Capital.

D)   Covenants.

The correct answer was  B)

When an analyst examines an issuer’s capacity, the analyst is assessing the issuer’s ability to repay its obligations.

12．Which of the following four C's of credit refers to the terms and conditions of the lending agreement?

A)   Contracts.

B)   Commitment.

C)   Covenants.

D)   Conditions.

The correct answer was  C)

Covenants represent the terms and conditions of the lending agreement. Covenants specify restrictions and requirements that management must follow.

13.Which of the following focuses on analyzing the quality of management?

A)   Capacity analysis.

B)   Character analysis.

C)   Commitment determination.

D)   Compensation analysis.

The correct answer was  B)

Character analysis is the act of assessing the quality of management, which is an important factor in assessing the issuing company’s credit strength.

14.All of the following are part of the four C’s of credit that Moody’s and S& use to analyze credit quality EXCEPT:

A)   capacity.

B)   category.

C)   collateral.

D)   covenants.

The correct answer was  B)

The four C’s of credit are character, capacity, collateral, and covenants.

15.Which of the following is NOT considered a strong and reliable source of liquidity for a company undergoing a credit analysis?

A)   Line of credit.

B)   Contractual back-up facility.

C)   Third-party guarantee.

D)   Ability to use asset securitization.

The correct answer was  A)

A line of credit is generally not contractual making it easy for banks to refuse to extend the credit.