Session 14: Fixed Income: Valuation Concepts
Reading 53: General Principles of Credit Analysis
LOS d: Evaluate the credit quality of an issuer of a corporate bond, given such data as key financial ratios for the issuer and the industry.
Which of the following would indicate a lessened capacity by a corporate bond issuer to pay principal and interest? Relative to the industry average, the issuer’s:
|
A) |
interest expense is lower relative to earnings. | |
|
B) |
acid-test ratio is lower. | |
|
C) |
equity is higher relative to its long-term debt. | |
The acid-test ratio is the current assets minus inventory divided by the firm’s current liabilities. A lower acid-test ratio would indicate lessened capacity to pay principal and interest. In essence, there is less assets to cover the firm’s current obligations. Higher equity relative to debt indicates greater capacity to pay. Lower interest expense indicates greater capacity to pay. | 
发表于 2011-3-22 15:52
|