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FRM > FRM > Flashcards

FRM Flashcards

1
Q

T7
What is liquidity ?

A

The ability to pay payments when they are due

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2
Q

T7
what is liquidity management

A

having enough capital to cover short borrowing

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3
Q

T7
how to manage liqidity

A

maximise income

mimimising not having enough cash

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4
Q

T7
out flows for a business

A

wages and salaries
other operating cost
intrest and tax

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5
Q

T7
stable business and Cyclical business?

and example

A

stable doesnt get affected by the economy
-e.g supermarket

cyclical does get affect by the ecnonomy good to bad
-e.g luxury products and umbrella makers

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6
Q

T7
price sensitivity ?
working capital management ?

A

how the change in price affects demand

company having enough cash to pay bills

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7
Q

T7
working capital formula

A

WC= CA - CL

ca = receivables , cash ,stock

cl = payables

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8
Q

T7
What do treasure do to keep a healthy capital for longer ?

A

paying suppliers late as possible and getting paid sooner by customers

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9
Q

T7
what do treasures do to get paid sooner by customers ?

A

they offer discounts to customers. (makes it cheaper)

they also decline discounts from suppliers to hold on to the cash longer .

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10
Q

T7
disaster plan
in the case of a downturn in the market , what would the company avoid ?

A

Not using credit to cover costs as it expensive

BUT letting the bank know so it can help with emergency short term borrowing

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11
Q

T7
what actives would they do to bring in cash?

A

-cost cutting
-reducing working capital (sending invoice to customers )
-selling assets or subsidiaries
-selling rights

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12
Q

T7
what is a headroom?

A

having extra money always available

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13
Q

T7
headroom formal

A

headroom = cash + used borrowing facilities

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14
Q

T7
internal methods of creating liquidity example increasing credit taken?

A
  • might lose goods , losing discounts

should stick to credit terms

implementation

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15
Q

T7
internal methods of creating liquidity example reducing debtors ?

A
  • selling debt to banks.
    -giving discounts to get paid quicker
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16
Q

T7
internal methods of creating liquidity ?

A

-reducing stock(not much demand not much material )
-working progress (not enough goods , effect production schedule )

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17
Q

T7
internal methods of creating liquidity ?

A

selling hulling or land then leasing back
(might get a lower sale because its rushed )

-big price reductions to get rid of inventory -rarly used

18
Q

T7
benefit of cashflow forecast ?

A
  • ensure liquidity at all times

-improve investement return
-borrowing only what’s needed

19
Q

T7
how to management cash surplus ?

A
  • good use of saving or investment
    -short term borrowing without penalties
20
Q

T7
surplus management cash ?p2

A

using lads or lags (helps with transaction exposure)

paying credits early using discounts

21
Q

T7
what to consider when short term cash investments

A
  • Flexibility
    -Accessibility
    -Time to maturity
    -Complexe
    -maximum/ mimunim
    -Return on investment
    -reputation
    -Realtionship bank
22
Q

T8
what things can affect the credit ratings ?

A

-people not being honest , manipulation
-countires rating can be affected by politics e.g Russia

23
Q

T8
how would you do rating methodology (way to rate credit )

A
  • startles industry risk
    -diversifcation size
    -profit
    -cashflow and balance sheet
24
Q

T8
bond specific issue which infulence credit rating are ?

A

-covernants attached to bonds
-bond seniority (if broke will they get paid first )
-maturity dates and coupons
-marketablitlty / liquidity of the bonds

25
Q

T8
what is covenants ?

A

rules that protect investors in case a borrowing company can and can’t do .if they break the agreement can lead to consequences .

26
Q

T8
what can if happen is a covenants is broken ?

A

ask for more money back or they face penalties ,which can lower credit rating .
-higher interest

27
Q

T8
rating commentary (credit rating or changed )

A

net debt
financial
finical policy target
business risk

28
Q

T8
how improve credit worthyness?

A

reduce borrowing
reducing dividends
internal cash generating
tighter covenants

29
Q

T8
affect of rating downgrading?

A

no access to paper market
breach of covenants
loss of reputation
harder to borrow
impact relationshipbanking

30
Q

T8
do all companies want a high credit rating

A

no not all companies as they down borrow as much

31
Q

T8
What is a credit rating

A

An agency opioin based on how trust worthy a company is in paying back loans.

32
Q

T8
What are the ranking of credit rating and what different borrowings?

A

AAA TO EVEN D

moody longterm A-C
STANDdrad &poor A-D
flitch /ABCA A-C

33
Q

T8
why are credit ratings needed?

A

banks need to carry out risk assessment
-easy to track till paid
-lots of borrowing can make it hard

34
Q

T8
what is corporate and municaple bond ?

A

c bond is the company sells bonds investor can rise capital

municaple bond is bonds issued by government to raise founds for hospitals and schools

35
Q

T8
who will the investors go to see if a investment is worth it ?

A

they go to a third party to do a credit anyslsi to see its with investing

36
Q

T8
how can different rationing affect a company ?

A

it can affect there credibility and publicity

37
Q

T8
how would a foreign investor be able to identify a good investment ?

A

If they don’t know the company they can still identify the rating .eveyonw can eveualte and understand

38
Q

T8
what aspects are covered in credit rating for investors?

A
  • repayments in full
    -can earn intrest
    -
39
Q

T8
what’s the rating process ?

A

w0 chose a rating agency
w1-2 questionnaire to issuer
w2-3 questionnaire complete & plan meeting
w4 meeting
w5 respect report
w6-7 rating decided
w7 given rating

40
Q

What is refinancing and what are the risks ?

A

Refinancing is a debt thats going to mature , so you get another loan to pay that off

Risks are default , can be more at risk depending on short term loans
Asking for long term loans

Swaps from floating to fixed
Selling some assets , debtors colletions

41
Q

What is Sovereign risk , strategic and business risk , management quality, financial factors, relationship with credit rating agency, bone specific issues

A

Sovereign risk -
Is about countries credit rating . The amount of debt a countries has can make the downgrade which can make them have to increase the interest as it’s seen as a risk for global investors . Corporates also have to set there interest higher then the government because the gov is seen as more trustworthy

Strategic and business risk -

This risk arises from a company’s strategic decisions, like entering new markets or launching new products. It includes challenges such as competing with larger global companies and assessing potential opportunities versus risks.

Management quality-

Management quality ratings go beyond numbers, incorporating subjective factors like reputation and track record. A strong, trusted manager is seen as less risky compared to one with a weaker reputation.

Financial factors-

Financial factors assess a company’s health, like free cash flow, ability to pay debt, and profitability, to understand its stability and risks.

Relationship with credit rating agency-
Credit ratings should be independent, but agencies might favor frequent issuers to secure future business.

Bond specific issues-
The bond prospectus provided to the rating agency details key information like security, coupon, and legal terms.

FRM (3 decks)

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