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Financial Analysis and Credit Management Flashcards

7 cards from real CBP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Financial Analysis and Credit Management flashcards as text

  1. Under Basel III capital requirements, what is the minimum Common Equity Tier 1 (CET1) ratio a bank must maintain?

    Answer: 4.5%

    Basel III requires banks to maintain a minimum CET1 ratio of 4.5% of risk-weighted assets, with an additional capital conservation buffer of 2.5% on top.

  2. Which method of inventory valuation typically results in higher cost of goods sold during periods of rising prices?

    Answer: LIFO (Last-In, First-Out)

    LIFO assigns the most recently acquired (higher-cost) inventory to cost of goods sold first, resulting in higher COGS and lower reported profits during inflationary periods.

  3. What is 'evergreening' in the context of bank credit management?

    Answer: Continuously renewing or restructuring a non-performing loan to avoid recognizing a loss

    Evergreening occurs when banks repeatedly roll over troubled loans to defer loss recognition, masking the true quality of the loan portfolio.

  4. A bank's net interest margin (NIM) is calculated as:

    Answer: Net interest income divided by average earning assets

    NIM is net interest income (interest earned minus interest paid) divided by average earning assets, measuring the bank's core lending profitability.

  5. In a leveraged buyout (LBO) credit analysis, which metric is most critical for assessing debt repayment capacity?

    Answer: Free cash flow to debt ratio

    In LBO analysis, free cash flow to debt (or similar coverage metrics) determines whether the acquired company can generate enough cash to service the significant acquisition debt.

  6. What is the primary distinction between a 'secured' and an 'unsecured' loan from a credit risk perspective?

    Answer: Secured loans have collateral backing, providing the lender a secondary repayment source

    Secured loans are backed by specific collateral (assets pledged), giving the lender a secondary source of repayment through liquidation if the borrower defaults.

  7. Which ratio measures how efficiently a company collects its accounts receivable?

    Answer: Days sales outstanding (DSO)

    Days Sales Outstanding (DSO) measures the average number of days it takes a company to collect payment after a sale, indicating receivables management efficiency.