Sample interview questions: How do you assess the impact of changes in interest rates or monetary policies on a borrower’s creditworthiness?
Sample answer:
Assessing the Impact of Changes in Interest Rates or Monetary Policies on a Borrower’s Creditworthiness
As a credit analyst, assessing the potential impact of interest rate and monetary policy changes on a borrower’s creditworthiness is crucial. Here’s how I approach this evaluation:
- Estimate the Impact on Debt Servicing: Higher interest rates increase the cost of servicing debt. I analyze the borrower’s loan terms, debt-to-income ratio, and cash flow to determine their vulnerability to interest rate hikes. Borrowers with a significant portion of variable-rate debt or loans close to maturity are particularly at risk.
- Assess Sensitivity to Short-Term and Long-Term Rates: The impact of interest rate changes depends on the maturity of the borrower’s debt. I examine the borrower’s funding strategy, the maturity profile of their debt, and the sensitivity to both short-term and long-term interest rate fluctuations.
- Consider the Impact on Cash Flow: Monetary policy changes can also affect the borrower’s cash flow. I analyze the borrower’s revenue streams, expenses, and earnings before interest and taxes (EBIT) to understand their vulnerability to changes in economic conditions that may arise from monetary policy adjustments.
- Evaluate Collateral Value: In the event of a default, lenders may rely on collateral to recover outstanding… Read full answer