CCM Credit Risk Evaluation 3

Question 1

Which element of the 'Five Cs of Credit' evaluates the economic environment and industry conditions?

Accepted Answer

Conditions

Answer

Conditions refers to external factors such as the economic climate, industry trends, and market conditions that may affect a borrower's ability to repay.

Question 2

A credit analyst notices a customer's accounts payable days have increased from 45 to 90 over two years. This most likely indicates:

Accepted Answer

The company may be stretching payables due to cash flow stress

Answer

A sharp increase in payable days often signals that a company is delaying supplier payments due to cash flow difficulties, a red flag in credit evaluation.

Question 3

Under the Uniform Commercial Code (UCC), a 'perfected security interest' provides a creditor with:

Accepted Answer

Priority claim over the collateral against other creditors

Answer

Filing a UCC-1 financing statement perfects a security interest, giving the creditor a priority claim over the specified collateral in the event of default or bankruptcy.

Question 4

Which ratio is most useful for assessing a company's ability to service its debt from operating earnings?

Accepted Answer

Interest coverage ratio (EBIT/Interest expense)

Answer

The interest coverage ratio measures how many times a company's operating earnings can cover its interest expense, directly assessing debt service capacity.

Question 5

A guaranty agreement differs from a surety agreement primarily because:

Accepted Answer

A guarantor's obligation is secondary and conditional, while a surety's is primary and unconditional

Answer

A guarantor is only liable after the primary debtor defaults, whereas a surety is co-equally liable from the outset and the creditor can pursue either party immediately.

(CCM) Certified Credit Manager Practice Test

(CCM) Certified Credit Manager Practice Test

CCM Credit Risk Evaluation 3