CFA Practice Question

CFA Practice Question

In assigning a credit rating to debt issuers, rating agencies (Standard & Poors, Moody's, Fitch, etc.) consider the "four C's" of credit. Which of the following is not one of these "four C's?"
A. Capitalization.
B. Capacity.
C. Covenants.
Explanation: In conducting a credit examination, rating agencies examine many factors of the issuer's business. The factors considered by rating agencies can be summarily characterized as the "Four C's of Credit." The Four C's of Credit are defined as the following:

Character
Capacity
Collateral
Covenants

While somewhat appealing in the intuitive sense, "capitalization" is not one of the "four-C's" of credit, rather is a component of "capacity" and "collateral." When examining debt and credit ratings, it is important to understand that a rating can be assigned for an entire company or for one debt issue. For instance, a company's most senior or secured debt may be issued a higher rating than its junior or unsecured debt.

User Contributed Comments 1

User Comment
danlan Difference between senior(secured) and junior (unsecured) debt.
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