Question 1

In the LCD and EM debt markets, sovereign bonds have historically been issued in foreign currencies.

Accepted Answer

A) True 
 B)False  True

Question 2

Rescheduling loans is easier than renegotiating payments on bonds because the same FIs typically form loan syndicates that create cohesiveness in negotiations.

Accepted Answer

A) True 
 B)False  True

Question 3

What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 25 cents on the dollar? (choose the closest answer)

Accepted Answer

A) 10 percent. 
B) 40 percent. 
C) 14 percent. 
D) 25 percent. 
E) Cannot be determined. 
A) 10 percent. 
B) 40 percent. 
C) 14 percent. 
D) 25 percent. 
E) Cannot be determined. B

Question 4

The allocation of country resources between present and future consumption is measured by which of the following variables of the credit scoring model of sovereign country risk exposure?

Accepted Answer

A) The debt service ratio. 
B) The import ratio. 
C) The variance of export revenue. 
D) The investment ratio. 
E) Domestic money supply growth. 
A) The debt service ratio. 
B) The import ratio. 
C) The variance of export revenue. 
D) The investment ratio. 
E) Domestic money supply growth.

Question 5

One problem with using CRA statistical credit scoring models to evaluate sovereign credit risk is the classification into only two possible outcomes.

Accepted Answer

A) True 
 B)False

Question 6

If the credit risk of a foreign borrower is good, then the sovereign country risk is irrelevant.

Accepted Answer

A) True 
 B)False

Question 7

In the LCD and EM debt markets, sovereign bonds must be collateralized by domestically-issued government bonds.

Accepted Answer

A) True 
 B)False

Question 8

The following is an example of a credit scoring model to estimate the probability of debt rescheduling for country I: Pi = 0.25 DSRi + 0.17 IRi - 0.03 INVRi + 0.84 VAREXi + 0.93 MGi
Where Piis the probability of rescheduling country I's debt; DSR is the country's debt service ratio; IR is the country's import ratio; INVR is the country's investment ratio; VAREX is the country's variance of export revenue; and MG is the country's rate of growth of the domestic money supply.
If two countries are identical in all respects except that country A's debt service ratio is 1.5, country B's debt service ratio is 1.25, country A's import ratio is 0.75, and country B's import ratio is 0.90, which country poses the least sovereign country risk?

Accepted Answer

A) Country A, because the higher debt service ratio's negative impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
B) Country B, because the higher debt service ratio's negative impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
C) Country A, because the higher debt service ratio's positive impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
D) Country B, because the lower debt service ratio's impact outweighs the higher import ratio's impact on the country risk exposure. 
E) They both have the same sovereign country risk exposure. 
A) Country A, because the higher debt service ratio's negative impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
B) Country B, because the higher debt service ratio's negative impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
C) Country A, because the higher debt service ratio's positive impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
D) Country B, because the lower debt service ratio's impact outweighs the higher import ratio's impact on the country risk exposure. 
E) They both have the same sovereign country risk exposure.

Question 9

Under the doctrine of sovereign immunity, creditors cannot force repayment of the debt.

Accepted Answer

A) True 
 B)False

Question 10

From the perspective of the lending FI, the risk of a well-diversified portfolio of loans should be less than weighted average risk of the individual loans.

Accepted Answer

A) True 
 B)False

Question 11

Money supply growth and the import ratio tend to have low systematic risk elements in a CRA analysis.

Accepted Answer

A) True 
 B)False

Question 12

In exchange for the loss of some present value of the interest and principal on a loan after a rescheduling, the lender avoids the permanent loss that would result from a default.

Accepted Answer

A) True 
 B)False

Question 13

Sometimes banks received criticism because domestic governments take special political steps to reduce the probability that foreign borrowers will default or repudiate their debt contracts, an occurrence that could cause financial harm to the domestic banks.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is a benefit to the borrower in a loan rescheduling?

Accepted Answer

A) The FI may receive tax benefits. 
B) Rescheduling may close the market for future loans. 
C) Rescheduling may create interruptions in the flow of international trade since letters of credit may be more difficult to acquire. 
D) Rescheduling may lower the present value of future payments in hard currencies. 
E) The FI may receive additional fees, collateral, and option features on the loan. 
A) The FI may receive tax benefits. 
B) Rescheduling may close the market for future loans. 
C) Rescheduling may create interruptions in the flow of international trade since letters of credit may be more difficult to acquire. 
D) Rescheduling may lower the present value of future payments in hard currencies. 
E) The FI may receive additional fees, collateral, and option features on the loan.

Question 15

Which of the following is a benefit to the lender in a loan rescheduling?

Accepted Answer

A) The FI may become locked into a particular loan portfolio structure. 
B) Rescheduling may close the market for future loans. 
C) Rescheduling may create interruptions in the flow of international trade since letters of credit may be more difficult to acquire. 
D) Rescheduling may lower the present value of future payments in hard currencies. 
E) The FI may receive additional fees, collateral, and option features on the loan. 
A) The FI may become locked into a particular loan portfolio structure. 
B) Rescheduling may close the market for future loans. 
C) Rescheduling may create interruptions in the flow of international trade since letters of credit may be more difficult to acquire. 
D) Rescheduling may lower the present value of future payments in hard currencies. 
E) The FI may receive additional fees, collateral, and option features on the loan.

Question 16

Lenders may find it costly to reschedule non-accruing sovereign country debt because

Accepted Answer

A) it is politically embarrassing. 
B) of tax reasons. 
C) they might be subject to greater regulatory attention. 
D) it is detrimental to maintaining good customer relations. 
E) bankruptcy costs are high. 
A) it is politically embarrassing. 
B) of tax reasons. 
C) they might be subject to greater regulatory attention. 
D) it is detrimental to maintaining good customer relations. 
E) bankruptcy costs are high.

Question 17

Traditional country risk analysis (CRA) that is based on discriminant statistical models often suffers from problems of using data that is not current.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is NOT a segment in the secondary market for sovereign debt?

Accepted Answer

A) Restructured loans. 
B) Brady bonds. 
C) Sovereign bonds. 
D) Performing loans. 
E) Nonperforming loans. 
A) Restructured loans. 
B) Brady bonds. 
C) Sovereign bonds. 
D) Performing loans. 
E) Nonperforming loans.

Question 19

The larger the import ratio of a country; the higher is the probability that the country will have to schedule its debt payments.

Accepted Answer

A) True 
 B)False

Question 20

The Institutional Investor Index is based on

Accepted Answer

A) spread of the required interest rate on a country's debt over LIBOR. 
B) a number of economic and political factors weighted according to their relative importance in determining country risk problems. 
C) surveys of the loan officers of major multinational banks. 
D) combined economic and political risk on a 10-point (maximum) scale. 
E) key economic ratios for each regional grouping. 
A) spread of the required interest rate on a country's debt over LIBOR. 
B) a number of economic and political factors weighted according to their relative importance in determining country risk problems. 
C) surveys of the loan officers of major multinational banks. 
D) combined economic and political risk on a 10-point (maximum) scale. 
E) key economic ratios for each regional grouping.

Exam 14: Sovereign Risk

In the LCD and EM debt markets, sovereign bonds have historically been issued in foreign currencies.

Rescheduling loans is easier than renegotiating payments on bonds because the same FIs typically form loan syndicates that create cohesiveness in negotiations.

What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 25 cents on the dollar? (choose the closest answer)

The allocation of country resources between present and future consumption is measured by which of the following variables of the credit scoring model of sovereign country risk exposure?

One problem with using CRA statistical credit scoring models to evaluate sovereign credit risk is the classification into only two possible outcomes.

If the credit risk of a foreign borrower is good, then the sovereign country risk is irrelevant.

In the LCD and EM debt markets, sovereign bonds must be collateralized by domestically-issued government bonds.

Under the doctrine of sovereign immunity, creditors cannot force repayment of the debt.

From the perspective of the lending FI, the risk of a well-diversified portfolio of loans should be less than weighted average risk of the individual loans.

Money supply growth and the import ratio tend to have low systematic risk elements in a CRA analysis.

In exchange for the loss of some present value of the interest and principal on a loan after a rescheduling, the lender avoids the permanent loss that would result from a default.

Sometimes banks received criticism because domestic governments take special political steps to reduce the probability that foreign borrowers will default or repudiate their debt contracts, an occurrence that could cause financial harm to the domestic banks.

Which of the following is a benefit to the borrower in a loan rescheduling?

Which of the following is a benefit to the lender in a loan rescheduling?

Lenders may find it costly to reschedule non-accruing sovereign country debt because

Traditional country risk analysis (CRA) that is based on discriminant statistical models often suffers from problems of using data that is not current.

Which of the following is NOT a segment in the secondary market for sovereign debt?

The larger the import ratio of a country; the higher is the probability that the country will have to schedule its debt payments.

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