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Understanding Long-Term Credit Ratings

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Questions and Answers

What is a long-term credit rating primarily a prediction of?

The short-term credit risk of the issuer

The issuer's profitability over time

The likelihood of default and the severity of the loss (correct)

The current market value of the issuer

What is a limitation of using credit ratings as a forecaster of default?

Credit ratings provide real-time default estimates

Default probabilities are updated infrequently

Credit ratings are more comprehensive than default probabilities

Credit ratings are discrete with a limited number of rating grades (correct)

What distinguishes Credit Models from Credit Analysis?

Credit Models involve only qualitative factors

Credit Models provide specific quantitative outputs like Probability of Default (correct)

Credit Analysis does not consider default probabilities

Credit Analysis is updated more frequently than Credit Models

Why can default probabilities be estimated in real-time unlike credit ratings?

Credit ratings are updated very infrequently (D) Signup and view all the answers

What is the primary focus of Credit Analysis in institutions?

A comprehensive process involving both quantitative and qualitative factors (D) Signup and view all the answers

What is a common qualitative analysis aspect in credit analysis?

Footnote Analysis (D) Signup and view all the answers

Which financial ratio is used to analyze a company's liquidity?

Quick Ratio (B) Signup and view all the answers

In credit analysis, what is the pro forma and projections focused on?

Growth Variables (C) Signup and view all the answers

Which financial ratio helps in evaluating a company's leverage?

Total Liabilities / Total Assets (A) Signup and view all the answers

What is a critical component of the PIMCO approach to credit analysis?

Business Fundamentals (A) Signup and view all the answers

How do private firms differ from other institutions in terms of credit ratings?

They don't have credit ratings available. (C) Signup and view all the answers

In credit analysis, what does the EBITDA/Interest Expense ratio assess?

(Interest Expense + Debt Due) / Cash Flow (A) Signup and view all the answers

What does the Debt-to-Equity Ratio measure in credit analysis?

$\frac{Total Debt}{Total Equity}$ (C) Signup and view all the answers

In credit analysis, what is the focus of the Issuer Analysis block in the 4 Blocks approach?

Business Fundamentals (D) Signup and view all the answers

What is a key aspect examined in Cost Structure Analysis within financial analysis?

Variable contribution margin (D) Signup and view all the answers