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
A credit analyst is reviewing a manufacturer whose receivables have grown 40% while sales grew only 10%. This is MOST likely a sign of:
Answer: Deteriorating collections or relaxed credit standards
Receivables growing disproportionately faster than sales suggests customers are paying more slowly, indicating collection problems or overly lenient credit terms.
In international credit transactions, 'country risk' encompasses:
Answer: Political instability, economic conditions, and transfer/convertibility risk that may prevent payment
Country risk is the aggregate risk that conditions within a buyer's country—political, economic, or regulatory—will prevent payment regardless of the buyer's willingness.
A 'subordination agreement' in credit risk management means:
Answer: A junior creditor agrees that senior debt must be repaid first in the event of default
A subordination agreement establishes priority, requiring junior (subordinated) creditors to step behind senior creditors in receiving repayment upon default or liquidation.
Which qualitative factor is MOST critical when extending credit to a closely-held private company?
Answer: The character, integrity, and management quality of the principals
In private companies, the owner-managers are the business, making their character and management competence the most critical qualitative credit factor.
A debtor-in-possession (DIP) financing arrangement occurs when:
Answer: A company in Chapter 11 bankruptcy receives new financing while continuing to operate
DIP financing allows a Chapter 11 company to borrow new money to fund operations during reorganization, with the DIP lender typically receiving super-priority status.
A credit department uses a 'risk-adjusted return' approach to pricing. This means:
Answer: Charging higher prices or fees to customers with higher default probability to compensate for risk
Risk-adjusted pricing ensures that higher-risk accounts pay more—through higher prices, fees, or shorter terms—to compensate the seller for the increased probability of loss.
When analyzing a financial statement, 'off-balance-sheet' items are important because they:
Answer: Reveal liabilities or obligations that may affect creditworthiness but are not shown as balance sheet debt
Off-balance-sheet obligations such as operating leases, guarantees, and contingent liabilities represent real financial risks that can significantly affect a company's true debt burden.