Question

Which of the following statements is false regarding credit risk analysis?

Multiple Choice

• A lender is protected against credit risks by a loan’s covenant provisions since the interest rate is fixed by the Federal Reserve Bank.

• High-quality financial statements help a credit analyst to see the true performance at a company.

• Greater default risk is determined to exist when there is significant organizational reliance on a certain individual or customer.

• An estimate of a firm’s future financial condition is very important to most lending decisions.

Answer 1

Answer:- Option (1):- A lender is protected against credit risks by a loan's covenant provisions since the interest rate is fixed by the Federal Reserve Bank.

Reason:- Though the borrower lends the money from any financial agencies by signing agreement in order to fulfill his financial needs in the short-run nor in the long-run period. Some provisions are indicated in the agreement by submitting the collateral securities to the lender agency. It also favors the lending agencies for some extent. But Federal Reserve Bank of US nation has already quoted the law enacted to the operations of the loans advancing activities. Such law provision is stated in Allowances for Loan and Lease losses (ALLL) concept clearly explains the guidelines to the lenders and as well as the borrowers. Lenders should maintain the separate balance sheet of the liability and also to analyse the risk factors before lending money to the borrowers as per standards of rules for borrowing fixed by the Federal Reserve Bank. So lenders are not always protected against credit risk because the interest rate is not fixed on. The Federal Reserve Bank may change the rate accordingly with the dollar exchange reserves as well the economic condition.