1. All creditors at the same level of the capital structure being treated the sa
ID: 2797233 • Letter: 1
Question
1. All creditors at the same level of the capital structure being treated the same is known as?
2. A credit analyst is looking at three different companies – an auto company, a drug company and a mining company. The auto and mining companies are cyclical. The drug company is non-cyclical. The least credit risk is likely in the
a. Auto company
b. Drug company
c. Mining company
3. Same companies in #17. The auto company has a debt/ebitda ratio of 6.0, the mining company has a debt/ebitda of 2.0 and the drug company has a debt/ebitda ratio of 1.0. Which company likely carries the most credit risk?
a. Auto company
b. Drug company
c. Mining company
4. At the bottom of an economic cycle the loss severity on a credit default is likely to be
a. Lower
b. Higher
c. Unchanged
5. At default at a company that is in a mature/declining industry is likely to experience severity that is
a. Lower
b. Higher
c. Unchanged
Explanation / Answer
1. All creditors at the same level of the capital structure being treated the same is known as the principle of PARI PASSU
2. the least credit risk is to b. Drug company (non -cyclical)
3. Which company likely carries the most credit risk? a. Auto Company (High debt to ebitda)
4. At the bottom of an economic cycle the loss severity on a credit default is likely to be Higher
5. At default at a company that is in a mature/declining industry is likely to experience severity that is Lower
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