Pre Exam CICC Day 14

In reviewing the risk that a borrower will fail the liquidity or solvency test, or both, which may indicate a failure to repay the loan, which area of credit risk is being analysed?

• Facility risk

• Market (industry and business) risk

• Financial risk

• Management risk

Are external factors relevant to the credit decision process?

• They need to be considered and evaluated to understand their impact on the credit decision process

• As they are beyond management’s control, they are not relevant to the credit decision process

• They are relevant only because lenders want to look at them, otherwise they do not add value to the credit decision process

• It is up to management to determine whether to include them as being part of the credit decision process

Which of the following are included in the assessment of factors in market (industry and business) risk?

I. Recognising the importance of the competitive marketplace

II. Grasping how financial, market (industry and business) and management risk affect one another

III. Looking at the availability of liquidity in the marketplace

IV. Understanding how market (industry and business) risk can affect a borrower’s liquidity

• II, III and IV only

• III and IV only

• I and IV only

• I, II and IV only

What does the solvency test determine?

• If there is enough cash from sources other than the cash generated from normal day-to-day operations (primarily liquidation of assets in distressed circumstances) to pay all debt principal and any accrued interest.

• If the business is generating enough cash from normal day-to-day operations to cover all normally occurring expenses, including interest and debt amortization

• If the business is generating enough cash from normal day-to-day operations to cover all normally occurring expenses, excluding interest and debt amortization

• If there is enough cash from sources other than the cash generated from normal day-to-day operation (primarily liquidation of assets in distressed circumstances) to pay all debt principal but excluding any accrued interest.

What is the first step in the loan decision process?

• Conduct management interviews

• Screen against loan policy

• Identify credit enhancements

• Build analysis assumptions

What is the key risk that is evaluated in assessing a business’s credit risk?

• How changes in the economic environment affect a business’s financing costs

• The degree of a business’s earnings volatility

• Whether a business can repay principal and interest completely and on time

• The business’s competitive position in its industry

What should a lender do to minimize the risk of loan loss arising from hazardous waste violations?

• Leave matters relating to hazardous waste issues and other environment risks to governmental authorities

• Dictate to a borrower how to handle hazardous waste issues as they arise

• Decline any loan request from a business with potential environmental risks

• Assess the borrower’s potential liability and its capacity to deal with the consequences of environmental issues.

There is a frequently more competition within lightly regulated industries than within heavily regulated ones

• True

• False

Through what means can government actions affect a borrower’s credit risk?

I. Lending-related regulations

II. Special interest legislation

III. Monetary policy

IV. Credit ratings

• I, II and III only

• III only

• I and IV only

• I, III and IV only

Which characteristics typify an economic expansion?

• Increased sales, lower operating costs, reduced borrowing needs

• Reduced borrowing needs, growing profits, improved cash flow

• Increased demand, growing inventory (stock) levels, increased capital spending

• Growing inventory (stock), increased accounts receivable (trade debtors), reduced capital spending