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.

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.