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Credit Analysis for Corporate Issuers

2024 Curriculum CFA Program Level I Fixed Income

Overview

In this learning module, we focus on the relative creditworthiness of non-financial corporate borrowers, building on earlier learning modules on corporate issuers as well as the earlier fixed-income module on credit risk and its components.

In particular, we assess a company’s activities, or its business model, and how this affects the company’s ability to meet its debt obligations. While a company’s probability of default (POD) and loss given default (LGD) are not directly observable, in the first lesson we consider qualitative and quantitative factors that affect these credit risk components. Financial statement analysis and cash flow projections are important tools used to conduct corporate credit analysis. The second lesson applies these tools to calculate and interpret a variety of financial ratios, including profitability, lever- age, and coverage metrics, to assess an issuer’s probability of default. The seniority rankings of specific debt issues and use of collateral are of particular importance in determining credit ratings for a corporate issue and assessing the LGD in an event of default, which is addressed in the third and final lesson.

1 PL Credit

If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.