Practice Test Geeks(CCP) Certified Credit Professional Practice Test
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Credit Analysis & Risk Assessment Flashcards

7 cards from real CCP 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 Analysis & Risk Assessment flashcards as text

  1. A guarantor has a net worth of $500,000 but $450,000 is tied up in illiquid real estate. How should a credit analyst assess this guarantee?

    Answer: The guarantee provides limited protection due to the illiquid nature of most assets

    A guarantee backed primarily by illiquid assets offers limited practical protection since realizing value from real estate can be slow and uncertain during a credit event.

  2. What is the primary distinction between 'Probability of Default (PD)' and 'Expected Loss (EL)'?

    Answer: PD measures likelihood of default alone; EL incorporates PD, LGD, and EAD together

    PD is just the probability a borrower defaults; Expected Loss = PD × LGD × EAD, combining probability, severity, and exposure into one risk metric.

  3. A company reports strong net income but consistently negative operating cash flow. What is the MOST likely explanation?

    Answer: Aggressive revenue recognition or working capital build-up consuming cash

    Persistent divergence between net income and operating cash flow often indicates aggressive accrual accounting or excessive working capital growth that consumes cash.

  4. Which financial ratio is most directly used to assess whether a company can service its interest obligations from operating earnings?

    Answer: Interest Coverage Ratio (EBIT / Interest Expense)

    The Interest Coverage Ratio measures how many times operating earnings cover interest expense, directly indicating the company's ability to meet interest obligations.

  5. In assessing commercial real estate (CRE) loan risk, what does the Debt Service Coverage Ratio (DSCR) measure?

    Answer: Net Operating Income divided by annual debt service, measuring cash flow sufficiency

    DSCR = NOI / Annual Debt Service; a ratio above 1.0x means the property generates enough income to cover loan payments, with higher ratios indicating more cushion.

  6. Which scenario BEST illustrates 'concentration risk' in a commercial credit portfolio?

    Answer: A lender with 60% of its loan book in a single industry like oil and gas

    Concentration risk arises when a large portion of the portfolio is exposed to a single industry, geography, or borrower, amplifying losses if that segment deteriorates.

  7. What is the purpose of a 'covenant' in a commercial loan agreement from a credit risk perspective?

    Answer: To provide early warning triggers and contractual remedies if the borrower's financial condition weakens

    Financial covenants establish threshold metrics (e.g., minimum DSCR, maximum leverage) that trigger lender action if breached, enabling early intervention before default.