Credit analysis Flashcards
How is the expected loss in the event of default calculated?
Expected loss=
exposure at default * probability of default * (1-probability of recovery)
Credit ratings from ‘AAA’ to ‘BBB-‘ correspond to an_________ grade. Ratings below ‘BBB-‘ are equivalent to a _________ grade (high yield or junk bonds)
investment and speculative
Which of the following types of collateral are characterised by high liquidity?
a) Traded securities
b) PPE
c) Goodwill
d) Patents and rights
e) All of the above
a)
What is true for the most liquid assets?
a) Cash and bank accounts are typical items
b) Inventory are typical items
c) Book values and liquidation values deviate the most
d) Book values and liquidation values are most aligned
a+d)
How is the Altman Z-score calculated?
Z-score=1.2((Working capital)/(Total assets))
+
1.4((Retained earnings)/(Total assets))
+
3.3(EBIT/(Total assets)
)
+0.6((Market value of equity)/(Book value of equity))
+
1.0(Sales/(Total assets))
What is true for the Altman Z-score?
a) Z-score<1.81→ High probability of bankruptcy
b)1.81<Z-score<2.91→ Grey area -> need further analysis
c) Z-score<2.91→ High probability of bankruptcy
d) Z-score<1.81→ Low probability of bankruptcy
e) Z-score>2.91→ Low probability of bankruptcy
a, b+e)
Which of the following are deficiencies of bankruptcy models?
a) Financial ratios ought to be compared with peers from the same industry –> coefficients must be estimated at industry levels
b) New set of coefficients must be generated on a regular basis
c) The cut-off scores that best distinguishes bankrupt from non-bankrupt firms is based on judgements
d) The bankruptcy models purely rely on historical information and do not include forward-looking information
e) Each statistical relies on setup assumptions that appear more or less realistic. In cases, where some of these assumptions are violated it may question the validity of the model
f) All of the above
f)
