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Asked by Thomas DeAngelis on Jun 22, 2024

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Credit risk analysis uses financial ratios that focus on an assessment of liquidity and solvency.

Credit Risk Analysis

The process of evaluating the likelihood that a lender may not receive the owed principal and interest, which leads to an interruption of cash flows and increased costs for collecting funds.

Financial Ratios

Quantitative measures derived from financial statement analysis used by investors and analysts to assess a company's performance, liquidity, profitability, and solvency.

Liquidity

The ease with which an asset can be converted into cash without affecting its market price.

  • Comprehend the significance of financial ratios in evaluating a borrower's risk of default and a company's operational efficiency.
  • Recognize the significance and obstacles in forecasting loan defaults and bankruptcies via financial examination.
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Wilson GarciaJun 26, 2024
Final Answer :
True
Explanation :
Credit risk analysis indeed uses financial ratios that assess the borrower's liquidity and solvency to determine the probability of default or creditworthiness. Liquidity ratios measure the borrower's ability to meet short-term obligations, while solvency ratios measure the borrower's ability to meet long-term obligations. Examples of liquidity ratios include current ratio and quick ratio, while examples of solvency ratios include debt-to-equity and interest coverage ratio.

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