BSEs Certification for Credit Rating (BCCR) Examination

MODEL TEST PAPER FOR BCCR Q. Id Question A Credit Rating agency is required to carry out all the following except: As per the SEBI, in India beyond what conversion period a convertible/ redeemable debenture needs to compulsorily rated by a credit agency: Which of the following ratings does not look at credit quality? Option 1 Collect information from the issuer of the debt instrument 12 months Option 2 Conduct audit of the accounts of the issuer Option 3 Interact in person with various entities Option 4 Collect relevant information from different sources

15 months

18 months

24 months

Corporate governance rating

Municipal obligation rating

Preference shares rating Always true except for structured finance ratings Credit Analysis & Research Ltd. (CARE Ratings)

Bank loan rat ing Depends on the type of instrument being rated

Credit ratings focus on timeliness of repayment of debt obligations and not the ultimate repayment

FALSE

Always true

Which of the following is the latest entrant among Indian Credit rating agencies?

Brickworks Ratings

Credit Rating Information Services of India Limited (CRISIL) Depends upon the risk-return trade-off

Fitch Ratings

Credit ratings provide the investors with recommendation to buy, hold or sell a particular financial instrument.

TRUE subject to review whenever required by the banker of the issuer recommend a buy/sell or hold action to the investor for a particular debt instrument

False

Depends upon the type of instrument being rated subject to surveillance during the life of the instrument provide an overall assessment of the ability of a firm to meet all its debt and interest obligations

Credit rating is

a one-time exercise

subject to review only once it accepted by the issuer

The primary objective of credit rating is to

provide an analysis of overall risks associated with a particular debt instrument

none of the above

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BSEs Certification for Credit Rating (BCCR) Examination

Which of the following indicates strong competitive position of an issuer

Presence in high growth industry Proximity to raw materials and markets Vintage of technology used Entity with dependenc e on few clients Brand equity Cyclical industries are subjected to volatility in annual cash flows High research and developme nt expenditure Utilities Cyclicality and seasonality

Affordable product pricing

Growing market share

None of the above

10

Cost of production of an issuer could be influenced by:

All the above

Average rate of interest Specific power and fuel consumption Entity with multiple business lines Access to working capital Downturns are more prolonged than upturns

Scale of operations Ability to command premium pricing None of the above

11

The factor that has no bearing on operating efficiency is: During a cyclical downturn, which of the following entities is least likely to be adversely affected

Yields and rejection rates Entity with least operating efficiency Access to distribution network

12

13

Following is not an entry barrier

Regulations

14

Entities operating in cyclical industries are exposed to more business risk than those operating in a stable environment because

Cycles are difficult to predict

a and b

15

Entry barriers in the global pharmaceutical industry are high because of

a and b

Presence of large number of players

Stringent regulations

16

Which of the following is an example of a non-cyclical industry The two key factors responsible for influencing an issuers competitive position are: The aspect that is not considered while assessing industry risk is

Hospitality Access to capital and group support Outlook of user industries Depends on the industry to which the entity belongs

Automobile Relationships with bankers and investors Performance of group companies

Cement Operational efficiency and market position Competitive intensity

17

18

Vulnerabilit y to imports

19

Business risk factors that are typically analyzed for any given entity are:

Size

Pricing power

Market share

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BSEs Certification for Credit Rating (BCCR) Examination

20

Identify the most relevant business risk parameter from the following, for aluminium industry Will increase in working capital funds have an impact on Return on Capital Employed (RoCE)?

Access to good quality bauxite reserves Yes, increase RoCE Through higher raw material costs Non operating expense

a and b

Pricing power

Captive coal linkage for power plants

21

No impact Through changes in accretion/de cretion to stock Depreciation

Yes, reduce RoCE

Cannot comment

22

How will an inventory write off impact operating profits? Operating profit margin for a pure manufacturing company is Operating income-Cost of goods sold where COGS includes Indebted Incorporation Limited has an 8 percent return on total assets of Rs 300,000 and a net profit margin of 5%. What are its sales? Operating Profitability indicate a companys If purchases are overstated by Rs. 10 lacs, and COGS and opening inventory are correct, the closing inventory will beIf the interest rates were to change during the year, which of the following statement is incorrect? Shaky Limited suffered major loss on uninsured assets due to a major earthquake. As per Indian GAAP, losses incurred should be All else being the same( including no additional debt), high annual dividend payouts result in Give & Take Co. provides the following numbers. Calculate the sales? Variable Cost is 58% of sales, Profit is Rs. 90 lacs, and fixed Cost is Rs. 15 lacs.

Both A and B

None of the given options

23

Interest income

Selling and advertising expense

24

Rs. 37,50,000

Rs. 4,80,000

Rs. 15,00,000

Rs. 3,00,000

25

Ability to manage stock levels Understate d by Rs. 10 lacs

Ability to use the assets in an efficient manner Overstated by Rs. 10 lacs

Ability to repay debts

None of the above

26

Depends on the inventory method

Unaffected

27

ROCE changes

Neither A nor B

Both A and B

RONW remain the same

28

Deducted from sales

Treated as part of COGS

Taken below the line

None of the above

29

Reduced Operating profitability

Reduced net profitability

Increase in RoCE

All of the above

30

Rs. 105 lacs

Rs. 208.6 lacs

None of the above

Rs. 250.0 lacs

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BSEs Certification for Credit Rating (BCCR) Examination

31

What is the discount rate used while calculating the NPV using the free cash flow to the firm Despite strong contractual structure, a project with weak fundamental viability will get a low rating From amongst the projects given completion risks would be the highest for which category of projects What are the methods of mitigating construction risk

Cost of equity

Cost of debt

None of the above

Weighted Average Cost of Capital

32

Always true

Depends on a case-tocase basis

True only in case of FALSE capital intensive projects Petrochemica l projects Toll Road

33

Power

Cannot be generalized Liquidated Damages from construction contract Both time and cost overrun

34

Fixed Price Contracts

All the above

Sponsor support for cost overrun

35

EPC Contracts are not useful for mitigating which of the following risks

Cost overrun

Market risks

Time overrun

36

Which of the following has the maximum potential of delaying projects

Land acquisition

Environment al clearance Would depend on experience of the EPC contractor Technology Risk Approval for raising funds through borrowings Exemptions given to various sections

Availability of Right-Of-Way Would depend on the nature of the project Operational Risk Dependence for defining operating contours through Municipal Act Low collection efficiencies

All the above

37

A very tight project schedule is likely to lead to delays in the project A power plant is unable to generate power because of lack of fuel availability. This would be an example of Credit quality of Municipalities is linked to the State Governments on account of:

Usually true

FALSE

38

Market Risk

Funding Risk

39

Dependenc e for timely devolution and grants Lack of timely revision of taxes and user charges

All the above

40

Municipal revenues tend to be depressed on account of:

All the above

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BSEs Certification for Credit Rating (BCCR) Examination

41

Devolution to Municipalities from State Governments are:

Bound by the State Finance Commissio n's recommend ations Bonds and Loans

Fixed

Decided by the Legislature Residential and Commercial Real Estate Assets None of the above Mortgage loan backed transactions May be greater or lower depending on each transaction

None of the Above

42

Which of the following assets can a CDO be backed by? Swaps can be used in securitisation transactions to mitigate which of the following risks? Interest rate swaps are commonly used in which of the following securitisation transactions in India? In a premium transaction with single tranche of PTCs and staggering of investor payouts, the total scheduled pool cash flows are greater than total scheduled PTC cash flows. In a certain structure, there are two tranches - Series A1 and Series A2. Series A1 is senior and A2 is subordinated. Based on this information only, which of the two tranches is expected to have lower credit risk? If the loan is securitised through a premium transaction with investor yield @ 9% per annum, what is the purchase consideration? Everything else being the same, a large sized entity has lower business risk than a small sized entity. Most probable explanation for this statement could be:

Credit Derivatives

All of the above

43

Interest rate risk Auto loan backed transaction s

Exchange rate risk Personal loan backed transactions

Both of the above

44

None of the above

45

Not enough information

Agree.

Disagree.

46

A1

Both will have equal credit risk

Can not be determined

A2

47

100 Large sized entity will always have a dominant market share Market share is concentrate d with few top players

100.92 Large sized entity is likely to be more diversified than a small sized entitys Given the high level of fragmentatio n, significant capacity addition is not likely

110

109

48

Large sized entity will always have better operational efficiency The industry cannot survive unless significant consolidation takes place

Large sized entity is a price leader

49

Following is true of a highly fragmented industry

Price leadership is unlikely, even by the largest player

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BSEs Certification for Credit Rating (BCCR) Examination

50

Under the new capital adequacy norms prescribed under BASEL , banks would use ratings to decide on risk weight of exposures except

Cash Credit facility

Personal Loan

Bank Guarantee

Term Loan

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BSEs Certification for Credit Rating (BCCR) Examination

Answers: Q. Id 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 Answer Conduct audit of the accounts of the issuer 18 months Corporate governance rating Always true Brickworks Ratings FALSE subject to surveillance during the life of the instrument provide an overall assessment of the ability of a firm to meet all its debt and interest obligations Growing market share All the above Ability to command premium pricing Entity with multiple business lines Regulations a and b a and b Utilities Operational efficiency and market position Performance of group companies Depends on the industry to which the entity belongs a and b Yes, reduce RoCE Both A and B Selling and advertising expense Rs. 4,80,000 None of the above Understated by Rs. 10 lacs Neither A nor B None of the above Increase in RoCE Rs. 250.0 lacs Weighted Average Cost of Capital Always true Cannot be generalized All the above Both time and cost overrun All the above Usually true Operational Risk All the above All the above Decided by the Legislature All of the above Both of the above Mortgage loan backed transactions Disagree. A1

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BSEs Certification for Credit Rating (BCCR) Examination

47 48 49 50

100.92 Large sized entity is likely to be more diversified than a small sized entity Price leadership is unlikely, even by the largest player Personal Loan

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