LOS b: Identify, explain, and analyze the key components of credit analysis, including both the borrower and the instrument.

Q1. Which of the following is one of the four Cs of credit analysis?

A)   Commitment.

B)   Capacity.

C)   Capital.

Q2. Rating agencies consider all of the following when assessing the quality of a firm's management EXCEPT:

A)   Ability to react to unexpected events.

B)   Strategic direction.

C)   Human resources policy.

Q3. Which of the following factors is part of the analysis of an issuer’s character?

A)   Company structure.

B)   Strategic direction.

C)   Basic operating position.

Q4. Which of the following 4-C's of credit refers to the terms and conditions of the lending agreement?

A)   Covenants.

B)   Contracts.

C)   Conditions.

Q5. Which of the following criteria assesses the ability of the issuer to repay its obligations?

A)   Capacity.

B)   Capital.

C)   Commitment.

Q6. Which of the following is NOT one of the criteria used to conduct a credit examination?

A)   Character.

B)   Consideration.

C)   Covenants.

Q7. All of the following are elements of the "4 C's" of credit analysis EXCEPT:

A)   Coverage.

B)   Capacity.

C)   Character.

Q8. Within the context of the 4-C’s of credit analysis, which of the following most accurately describes the “character” of a firm?

A)   The terms and conditions of the loan agreement.

B)   The integrity of management and its commitment toward the repayment of the loan.

C)   The availability of cash flow and other assets to repay the loan.

Q9. Within the context of the 4-C’s of credit analysis, which of the following most accurately describes the “capacity” of a firm?

A)   The availability of cash flow and other assets required by a corporation to repay its obligations.

B)   The integrity of management and their commitment toward repayment of the loan.

C)   The terms and conditions of the loan agreement.

A)   Affirmative covenants.

B)   Third-party guarantees.

C)   Material adverse change clause.

Q11. Which of the following factors is NOT part of the analysis of an issuer’s character?

A)   Control systems.

B)   Financial philosophy.

C)   Parent company support agreements.

Q12. Which of the following factors is least likely part of the analysis of an issuer’s character?

A)   Conservatism.

B)   Succession planning.

C)   Executive compensation and benefits structure.

Q13. Which of the following is least likely considered a strong and reliable source of liquidity for a company undergoing a credit analysis?

A)   Ability to use asset securitization.

B)   Contractual back-up facility.

C)   Line of credit.

Q14. 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)   covenants.

C)   category.

Q15. Which of the following focuses on analyzing the quality of management?

A)   Capacity analysis.

B)   Compensation analysis.

C)   Character analysis.

Q16. Which of the following least likely represent sources of liquidity for a company?

A)   Operating cash flows.

B)   Investing cash outflows.

C)   Back-up credit facilities.

Q17. Which of the following is most likely to affect the analysis of a firm's ability to repay the interest and principal components of its debt?

A)   The level of the company's debt to total assets ratio.

B)   The character of the firm's management.

C)   The firm's ability to generate operating cash flows.

Q18. Which of the following statements regarding the analysis of an issuer’s capacity to pay is FALSE?

A)   An analyst should examine the firm's financial position over the past three to five years to help determine capacity to pay.

B)   A "material adverse change clause" would weaken a back-up facility.

C)   A noncontractual line of credit is viewed as a strong back-up facility.

LOS b: Identify, explain, and analyze the key components of credit analysis, including both the borrower and the instrument. fficeffice" />

Q1. Which of the following is one of the four Cs of credit analysis?

A)   Commitment.

B)   Capacity.

C)   Capital.

Correct answer is B)

The four Cs of credit are character, capacity, collateral, and covenants.

Q2. Rating agencies consider all of the following when assessing the quality of a firm's management EXCEPT:

A)   Ability to react to unexpected events.

B)   Strategic direction.

C)   Human resources policy.

Correct answer is C)

Of the factors listed, the firm's human resouces policies would be the least important factors considered when assessing management quality.

Q3. Which of the following factors is part of the analysis of an issuer’s character?

A)   Company structure.

B)   Strategic direction.

C)   Basic operating position.

Correct answer is B)

Important considerations of the issuer’s character include: strategic direction, financial philosophy, conservatism, track record, succession planning, and control systems.

Q4. Which of the following 4-C's of credit refers to the terms and conditions of the lending agreement?

A)   Covenants.

B)   Contracts.

C)   Conditions.

Correct answer is A)

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

Q5. Which of the following criteria assesses the ability of the issuer to repay its obligations?

A)   Capacity.

B)   Capital.

C)   Commitment.

Correct answer is A)

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

Q6. Which of the following is NOT one of the criteria used to conduct a credit examination?

A)   Character.

B)   Consideration.

C)   Covenants.

Correct answer is B)

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

Q7. All of the following are elements of the "ffice:smarttags" />4 C's" of credit analysis EXCEPT:

A)   Coverage.

B)   Capacity.

C)   Character.

Correct answer is A)

The other two are covenants and collateral.

Q8. Within the context of the 4-C’s of credit analysis, which of the following most accurately describes the “character” of a firm?

A)   The terms and conditions of the loan agreement.

B)   The integrity of management and its commitment toward the repayment of the loan.

C)   The availability of cash flow and other assets to repay the loan.

Correct answer is B)

"Character" is the integrity of the firm's management and its commitment to the loan.

Q9. Within the context of the 4-C’s of credit analysis, which of the following most accurately describes the “capacity” of a firm?

A)   The availability of cash flow and other assets required by a corporation to repay its obligations.

B)   The integrity of management and their commitment toward repayment of the loan.

C)   The terms and conditions of the loan agreement.

Correct answer is A)

Capacity is one of the 4-C's of credit analysis and deals with generation of cash flows.

Q10. Which of the following items is least likely of concern to the analyst when trying to assess the ability of the firm to pay its debt?

A)   Affirmative covenants.

B)   Third-party guarantees.

C)   Material adverse change clause.

Correct answer is A)

When assessing liquidity, the analyst is concerned with the company’s financial position, operating cash flows, working capital position, back-up credit facilities, the strength of back-up credit facilities, and third-party guarantees.

Q11. Which of the following factors is NOT part of the analysis of an issuer’s character?

A)   Control systems.

B)   Financial philosophy.

C)   Parent company support agreements.

Correct answer is C)

Parent company support agreements are part of the analysis of the capacity of the issuer to pay rather than the issuer’s character.

Q12. Which of the following factors is least likely part of the analysis of an issuer’s character?

A)   Conservatism.

B)   Succession planning.

C)   Executive compensation and benefits structure.

Correct answer is C)

Executive compensation structure is not part of the credit analysis. Credit agencies generally try to assess management quality by understanding business strategies and policies created by management.

Q13. Which of the following is least likely considered a strong and reliable source of liquidity for a company undergoing a credit analysis?

A)   Ability to use asset securitization.

B)   Contractual back-up facility.

C)   Line of credit.

Correct answer is C)

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

Q14. 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)   covenants.

C)   category.

Correct answer is C)

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

Q15. Which of the following focuses on analyzing the quality of management?

A)   Capacity analysis.

B)   Compensation analysis.

C)   Character analysis.

Correct answer is C)

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

Q16. Which of the following least likely represent sources of liquidity for a company?

A)   Operating cash flows.

B)   Investing cash outflows.

C)   Back-up credit facilities.

Correct answer is B)

Of the three elements, the investing cash outflows would not be a source of liquidity for the firm.

Q17. Which of the following is most likely to affect the analysis of a firm's ability to repay the interest and principal components of its debt?

A)   The level of the company's debt to total assets ratio.

B)   The character of the firm's management.

C)   The firm's ability to generate operating cash flows.

Correct answer is C)

Although we would look at the company's debt-to-total assets ratio in determining the company's ability to repay its debt, the operating cash flows tend to be more critical to the analysis.

Q18. Which of the following statements regarding the analysis of an issuer’s capacity to pay is FALSE?

A)   An analyst should examine the firm's financial position over the past three to five years to help determine capacity to pay.

B)   A "material adverse change clause" would weaken a back-up facility.

C)   A noncontractual line of credit is viewed as a strong back-up facility.

Correct answer is C)

A strong back-up facility exists when a lender is contractually obligated to provide back-up financing. If the agreement is noncontractual then the back-up facility is considered weak.

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