Question

Please discuss these topics. Your discussion should include, among others, the importance of credits in the capital market, the significance of crediting ratings for your long-term viability. demand and supply of the credit, chance of default, financial ratios covering solvency and liquidity, the importance of credit ratings and bankruptcy prediction model (Altman's Z score) 150 words talking about these topics, please do not write the definitions of each item i need a discussion.

Answer 1

(1): Importance of credits in the capital market- Credit is the term that is used when investors or traders buy securities without paying full amount. Credit is provided by share broking companies where investors can buy shares on credit or on leverage if they have some amount or shares in their accounts. Traders take position on future and options by investing minimum margin and not the full contract value.

For example: If a trader is buying 100 shares of ABC Company at $50, his total purchase price is $5000 (100*50) but if he buys on margin, he can just pay 50% and can buy shares of worth $5000.

(2): Significance and Importance of crediting ratings for your long-term viability- Credit rating is the rating given by credit rating agencies like Fitch, Standard & Poor's, Moody's ICRA, CARE etc. These ratings are given on the basis of repayment capacity of debt, credit ratings are given to companies, banks, financial institutions, bonds etc.

Higher Credit ratings improve the image of company in the market, if a debt has lower rating, it has to pay high interest so that people can buy it. Credit ratings are good for investors and creditors. Creditors can take loan decision on the basis on credit rating, investors can take investment decisions.

(3): Demand and supply of the credit- Demand means, how many people want credit in the country, what is the current scenario, are people willing to take loan and what they are doing with the loan. Supply is availability of the credit in the market. If supply of credit is more and demand is less, interest rates will come down and vice versa.

(4): Financial ratios- These are the numbers that tell relationship between two or more variables. Financial ratios tell the financial position and viability of companies.

Solvency Ratio- These ratio tell the capacity of companies to meet their debt obligation, this ratio includes:

1. Debt to Total Assets ratio
2. Debt to Equity ratio
3. Interest coverage ratio

Liquidity Ratios- Tell liquidity position of the company. It tells whether company is able to pay its short term obligations or not.

These include:

1. Current ratio
2. Quick ratio
3. Cash ratio