Which of the following signifies an improvement in risk rating from "Moderate Risk" to "Low Risk"?

Which of the following signifies an improvement in risk rating from "Moderate Risk" to "Low Risk"?

• A. A higher Debt Service Coverage Ratio
• B. A lower Amortization Period
• C. Increased Debt to Equity ratio
• D. Decreased Tangible Net Worth

Answer: (A)

An improvement in risk rating from "Moderate Risk" to "Low Risk" is best represented by a higher Debt Service Coverage Ratio. This ratio indicates an organization's ability to cover its debt obligations with its cash flow. When the Debt Service Coverage Ratio increases, it reflects a stronger capacity of the borrower to meet its debt payments, signaling lower financial risk. Lenders view a higher ratio as an improved situation, which justifies the move from a "Moderate Risk" to a "Low Risk" classification. In contrast, the other options do not align with an improvement in risk classification. A lower Amortization Period typically reflects shorter repayment terms, which could increase payment burdens, possibly leading to higher risk. An increased Debt to Equity ratio means that a company is taking on more debt relative to its equity, which generally indicates higher financial leverage and thus potential risk. Additionally, a decreased Tangible Net Worth implies a weaker financial position, as it denotes fewer assets available to cover liabilities, which is a signal of higher risk rather than a lower one.

An improvement in risk rating from "Moderate Risk" to "Low Risk" is best represented by a higher Debt Service Coverage Ratio. This ratio indicates an organization's ability to cover its debt obligations with its cash flow. When the Debt Service Coverage Ratio increases, it reflects a stronger capacity of the borrower to meet its debt payments, signaling lower financial risk. Lenders view a higher ratio as an improved situation, which justifies the move from a "Moderate Risk" to a "Low Risk" classification.

In contrast, the other options do not align with an improvement in risk classification. A lower Amortization Period typically reflects shorter repayment terms, which could increase payment burdens, possibly leading to higher risk. An increased Debt to Equity ratio means that a company is taking on more debt relative to its equity, which generally indicates higher financial leverage and thus potential risk. Additionally, a decreased Tangible Net Worth implies a weaker financial position, as it denotes fewer assets available to cover liabilities, which is a signal of higher risk rather than a lower one.