Reading 53: General Principles of Credit Analysis-LOS b 习题 border, General, following, 2011, class

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Session 14: Fixed Income: Valuation Concepts
Reading 53: General Principles of Credit Analysis

LOS b: Explain and analyze the key components of credit analysis.

 

 

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

A) Capacity.

B) Commitment.

C) Capital.

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

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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.

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

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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.

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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.

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Which of the following statements regarding the analysis of an issuer’s capacity to pay is least accurate?

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.

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

A) Control systems.

B) Parent company support agreements.

C) Financial philosophy.

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

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

A) Executive compensation and benefits structure.

B) Conservatism.

C) Succession planning.

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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.

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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.

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

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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.

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

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

A) Character analysis.

B) Capacity analysis.

C) Compensation analysis.

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

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

A) Third-party guarantees.

B) Ability to securitize assets.

C) Affirmative covenants.

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When assessing capacity to pay, the analyst is concerned with the company’s financial position and liquidity. Sources of liquidity include working capital, operating cash flows, back-up credit facilities, securitization of assets, and third-party guarantees. Affirmative covenants are not directly related to the firm's capacity to pay.