"Fixed Income": The Four Cs of Credit Analysis framework
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Questions 1:
Which of the following is least likely a component of the “Four Cs of Credit Analysis” framework?
A 、Covenants
B 、Competition
C 、Collateral
Questions 2:
A credit analyst observes the following information for Zeta Corp. and its industry.
Based on this information, it is most likely that the credit risk of Zeta Corp. is:
A、 below its industry peers.
B 、similar to its industry peers.
C 、above its industry peers.
B is correct. The “Four Cs of Credit Analysis” framework includes capacity, collateral, covenants, and character. Competition is not one of the components.
A is incorrect because covenants are the terms and conditions of lending agreements that the issuer must comply with. It is part of the “Four Cs of Credit Analysis” framework.
C is incorrect because collateral refers to the quality and value of the assets supporting the issuer’s indebtedness. It is part of the “Four Cs of Credit Analysis” framework.
C is correct. The company has a similar return on capital, but it has significantly higher leverage as well as a lower EBITDA interest coverage ratio than its industry peers. It is likely that the company’s credit risk will be above its industry peers.
A is incorrect because the company has significantly higher leverage as well as a lower EBITDA interest coverage ratio than the industry median, indicating that its credit risk is above its industry peers.
B is incorrect because the company has significantly higher leverage as well as a lower EBITDA interest coverage ratio than the industry median, indicating that its credit risk is above its industry peers.
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