Credit Risk Evaluation Flashcards
7 cards from real CCM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Credit Risk Evaluation flashcards as text
In a bankruptcy proceeding under Chapter 7, which creditors are paid LAST?
Answer: Equity holders (shareholders)
In Chapter 7 liquidation, equity holders are the residual claimants and are paid only after all creditors—secured and unsecured—have been satisfied.
A 'preference payment' in bankruptcy law refers to:
Answer: A payment to a creditor within 90 days before filing that gave them more than they would receive in liquidation
The bankruptcy trustee can recover preference payments—made within 90 days (one year for insiders) before filing—that gave a creditor more than they'd receive in a Chapter 7 distribution.
Which credit risk mitigation tool transfers the risk of buyer non-payment to a third-party financial institution?
Answer: Trade credit insurance
Trade credit insurance (accounts receivable insurance) indemnifies the seller against buyer default, transferring the non-payment risk to the insurer.
A letter of credit (LC) provides credit risk protection because:
Answer: It converts buyer credit risk into bank credit risk
An LC substitutes the buyer's creditworthiness with the issuing bank's obligation to pay, shifting the seller's risk from the buyer to the bank.
The 'Z-score' model developed by Edward Altman is used in credit analysis to:
Answer: Predict the probability of corporate bankruptcy
Altman's Z-score combines five financial ratios into a single score that has been shown to accurately predict corporate bankruptcy up to two years in advance.
When a customer places a significantly larger-than-normal order, the credit manager should FIRST:
Answer: Request updated financial information and review the credit file before approving
An unusually large order changes the risk profile of the account, warranting updated financial review before committing to the increased exposure.
Which of the following is an example of 'cross-default' in a credit agreement?
Answer: A borrower defaults on one loan, automatically triggering default on all other loans with that lender
A cross-default clause states that if a borrower defaults on one obligation, they are immediately deemed in default on all other loans containing the same clause.