Financial Analysis Flashcards

A finance company has a $500 million average receivables portfolio and $40 million in net charge-offs for the year. What is the annualized net charge-off rate?

Answer: 8%

$40 million / $500 million = 8% net charge-off rate.

Which item is calculated as gross charge-offs minus recoveries?

Answer: Net charge-offs

Net charge-offs are gross charge-offs less amounts later recovered, such as repossession sale proceeds.

Why does a lender record a provision for credit losses on its income statement?

Answer: To build or adjust the allowance for expected loan losses

The provision is the expense that funds the allowance for credit losses on the balance sheet.

A lender earns 18% on its loan portfolio and pays 6% on its borrowings. If both balances are the same size, what is the approximate net interest spread?

Answer: 12%

Net interest spread is the yield on assets minus the cost of funds: 18% - 6% = 12%.

Which ratio best measures how much a finance company relies on borrowed money compared with owners' capital?

Answer: Debt-to-equity ratio

Debt-to-equity compares total liabilities with shareholders' equity to show leverage.

In a static pool analysis, how are auto loans grouped?

Answer: By the period in which they were originated

Static pools track loans from the same origination period so their performance can be compared over time.

A $10,000 auto loan at 12% APR is repaid in 48 equal monthly payments. Which statement about amortization is correct?

Answer: Early payments go mostly to interest, and later payments go mostly to principal

Interest is charged on the outstanding balance, so the interest share shrinks as the balance falls.