单选题 Arnold Barker is an analyst at BAYCON Investments. He has been asked to revise BAYCON’s credit analysis process for corporate fixed-income securities. This credit analysis process is the basis for the selection of individual bonds for BAYCON’s fixed-income portfolios. Hank Su, Barker’s supervisor, comments that one limitation of the current credit analysis process at BAYCON is that it only provides an estimate of a bond’s default risk. He asks Barker to expand the credit analysis process to provide an estimate of a bond’s credit spread risk. Su defines credit spread risk as follows: 　　"Credit spread risk is the risk that the issuer will fail to satisfy the terms of the bond with respect to payments.” 　　In addition, Su believes that the current credit analysis process focuses too much on character, collateral, and covenants, and not enough on capacity. In response to Su’s observations, Barker develops a quantitative debt-capacity model to assess the capacity of an issuer to meet its obligations. His debt-capacity model is based on the issuer’s profitability, debt coverage, and cash flow analysis. Barker decides to use the model to evaluate Haynes Industries, a recent investment-grade bond issuer. To calculate the inputs to the debt-capacity model, Barker gathered selected financial data, displayed in Exhibit 1, on Haynes Industries. 　　Exhibit 1 　　Selected Financial Data for Haynes Industries 　　(In millions)

单选题 Su’s definition of credit spread risk is: ()

A、 Correct.
B、 Incorrect, because credit spread risk is the risk that a bond’s price will fall when the bond’s risk premium increases while the yield on a similar maturity Treasury bond falls.
C、 Incorrect, because credit spread risk is the risk that a bond’s price will fall when the bond’s risk premium decreases while the yield on a similar maturity Treasury bond rises.
D、 Incorrect, because credit spread risk is the risk that a bond’s price will fall when the bond’s risk premium remains constant while the yield on a similar maturity Treasury bond rises.

【正确答案】 A

【答案解析】Distinguish among default risk, credit spread risk, and downgrade risk. 　　Credit spread risk is the risk an issuer’s debt obligation will relatively decline due to an increase in the credit spread. In this case the credit spread is increasing and the bond’s price will fall.

单选题 The "funds from operations / total debt" ratio for Haynes Industries for 2004 was closest to: ()

【正确答案】 C

【答案解析】Calculate, critique, and interpret the key financial ratios used by credit analysts. 　　Funds from operations / total debt = 7,672 / 14,147 = 54.23%. Funds from operations is defined as (Net Income + Depreciation & Amortization + Other non-cash charges) = (5,186 + 1,703 + 783) = 7,672. Total debt is defined as (Current Maturity of LTD + Long-Term Debt + Lease Debt Equivalent) = (2,172 + 11,475 + 500) = 14,147.

单选题 For 2004, compared with 2003, did Haynes Industries have an increase or decrease in: ()

【正确答案】 B

【答案解析】Calculate, critique, and interpret the key financial ratios used by credit analysts. 　　The interest coverage ratio [(EBIT (EBITDA)) / interest expense] increased from 8.97 (9.89) in 2003 to 10.40 (11.38) in 2004, and short-term solvency decreased from 1.358 in 2003 to 1.128 in 2004 where:

单选题 Given the debt structure described in Dawson’s first statement, the factor that is least likely to affect the creditworthiness of the high-yield issuer is the: ()

【正确答案】 C

【答案解析】Identify, explain, and interpret the typical elements of the corporate structure and debt structure of a high-yield issuer and the impact of these elements on the risk position of the lender. Bank loans have a priority over other debt issues; therefore the presence of senior bonds in the debt structure will have little impact on the credit analysis of high-yield issuers.

单选题 Regarding Dawson’s second statement that refers to asset-backed securities is he correct or incorrect in describing the model’s ability to: ()

【正确答案】 C

【答案解析】Discuss the factors considered by rating agencies in rating asset-backed securities. 　　In the case of an asset-backed security, the quality of the service is evaluated using factors such as servicing history, underwriting standards for loan origination, servicing capabilities, business environment, and financial condition. The model will only address financial condition. Dawson is correct in stating that the model cannot be used to determine the ability of the underlying collateral to generate cash flows. 　　