Credit Analysis Flashcards

A borrower's quick ratio is 0.6. What does this suggest?

Answer: The borrower may struggle to meet immediate obligations without selling inventory

A quick ratio below 1.0 indicates that liquid assets (excluding inventory) are insufficient to cover current liabilities, signaling liquidity risk.

In credit underwriting, what does 'seasoning' of a loan refer to?

Answer: The length of time a loan has been outstanding with a payment history

Loan seasoning refers to the time elapsed since origination, with more seasoned loans providing actual payment performance data to assess credit quality.

Which financial statement is most useful for assessing a company's ability to repay debt over time?

Answer: Cash flow statement

The cash flow statement shows actual cash generation and usage, making it the best indicator of a borrower's ability to service debt obligations.

What is 'credit migration' in portfolio credit analysis?

Answer: A borrower's shift in credit rating over time

Credit migration tracks how a borrower's credit rating changes (upgrades or downgrades) over a period, reflecting changing credit quality in a portfolio.

A bank requires a loan-to-value (LTV) ratio of no more than 80% for a commercial real estate loan. The property is appraised at $1,000,000. What is the maximum loan amount?

Answer: $800,000

Maximum loan = LTV × Appraised Value = 80% × $1,000,000 = $800,000.

Which of the following best describes 'credit concentration risk'?

Answer: Overexposure to a single borrower, sector, or geography

Credit concentration risk arises when a lender has excessive exposure to a single borrower, industry, or region, amplifying potential losses.

What is the purpose of stress testing in credit analysis?

Answer: To evaluate how a borrower or portfolio performs under adverse economic scenarios

Stress testing simulates adverse conditions such as recessions or interest rate spikes to assess whether borrowers or portfolios can withstand economic shocks.