Analysis of Debt

Correct Answer: The issuer's historical stock price performance

When analyzing the credit risk of a bond issuer, the issuer's historical stock price performance should be given the least emphasis according to CFA Level 1 standards. The issuer's ability to generate sufficient cash flows to service its debt obligations and its leverage ratios, which impact its financial flexibility, are more important factors in assessing credit risk. Stock price performance is less relevant because it reflects the market's perception of the company's equity value, which is subordinate to debt in the capital structure. Bond investors are primarily concerned with the issuer's ability to meet its debt obligations, rather than the potential for capital appreciation in the company's stock.

Correct Answer: The company's ability to generate stable and sufficient cash flows to service its debt obligations

When analyzing the credit risk of Zenith Corporation's bonds, the most significant factor according to CFA Level 1 standards is the company's ability to generate stable and sufficient cash flows to service its debt obligations. Positive free cash flow over the past five years indicates that Zenith Corporation has been able to generate cash from its operations after accounting for capital expenditures. This consistent cash flow generation is crucial for the company to meet its debt obligations. While the debt-to-equity ratio and interest coverage ratio provide insights into the company's capital structure and ability to cover interest payments, respectively, they are not as critical as the company's cash flow generation capacity in assessing its credit risk. Therefore, the company's ability to generate stable and sufficient cash flows to service its debt obligations is the most significant factor in analyzing Zenith Corporation's credit risk according to CFA Level 1 standards.

Correct Answer: The company's ability to generate sufficient cash flow to service its debt obligations, as demonstrated by its stable revenue stream, profitability, and growing cash flow from operations.

When analyzing the credit risk of TechCorp's new bond issue, the most important factor to consider is the company's ability to generate sufficient cash flow to service its debt obligations. This is best demonstrated by TechCorp's stable revenue stream, profitability, and growing cash flow from operations over the past five years. While the company's debt-to-equity ratio of 1.1 indicates a relatively high level of financial leverage, it is still within acceptable limits for a well-established technology company and should be given less emphasis compared to the company's cash flow generation ability. The bond's face value of $200 million, although significant, is justified by the company's need to finance its research and development initiatives. However, the size of the bond issue itself should not be the primary focus when assessing the credit risk of the bond.