FRM Part II · FRM Exam Part II · Credit Risk Management
In a credit analysis using the five Cs framework, a lender examines the borrower's cash flow stability, asset base and the amount of owner equity invested. Which pairing correctly matches these elements to the five Cs?
Cash flow stability reflects capacity to repay, pledged assets reflect collateral, and owner equity invested reflects capital. Character relates to willingness and reputation, and conditions to the economic or industry environment, so the correct pairing is capacity, collateral and capital.
- ACharacter, collateral and conditions
- BCapacity, collateral and capitalCorrect
- CCapital, conditions and character
- DCapacity, conditions and character
Explanation
Cash flow stability reflects capacity to repay, the asset base pledged relates to collateral, and owner equity is capital. Character concerns reputation and willingness to pay; conditions concern the economic and industry environment.
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