Credit risk (Chap 4)

Question 1

What is credit risk

Answer 1

It is the risk that a borrower will default

It arises whenever a borrower is expecting to use future cash flows to pay a current debt (A/P)

The impact is mainly to the lender and includes lost principal and interest, disruption to cash flows and increased collection costs

Question 2

What is credit risk generated by

Answer 2

Accounts recievable and short term investments + long term investments.

Question 3

What is the 4c risks of credit risk

Answer 3

condition
character
capital
capacity

Question 4

What is condition

Answer 4

Basically its the condition of how the company is doing

Question 5

What is character

Answer 5

Refers to the credit history and how they have conducted their business. It signals a borrower’s reputation track record for repaying debts.

Question 6

What is capital

Answer 6

When business applies for a loan to make potential investment, the lender considered if the business owner is also placing his own money

Question 7

What is capacity

Answer 7

Borrowers ability to repay a loan by compparing operational income against recurring debt

Question 8

Debt ratio

Answer 8

Tells us how business financed its assets as well as its ability to repay debt