Deck 12: Sovereign Risk

Question 1

Which of the following is a list of countries that have followed the course of debt repudiation since WWII?

A)China, Cuba, North Korea
B)Japan, South Korea, Afghanistan
C)Malaysia, Mexico, Chile.
D)Germany, Argentina, Poland

Answer 1

A

Question 2

Which of the following statements is true?

A)The import ratio is the ratio of a country's imports to its total foreign currency obligations.
B)The import ratio is the ratio of a country's imports to its total debt.
C)The import ratio is the ratio of a country's imports to its total GDP.
D)The import ratio is the ratio of a country's imports to its total foreign currency reserves.

Answer 2

D

Question 3

Which of the following are reasons why debt rescheduling is more likely than debt repudiation?

A)There are fewer FIs in any international lending syndicate compared to the number of bondholders.
B)Many international loan syndicates comprise the same groups of FIs, increasing the probability of consensus in case of rescheduling.
C)There are more FIs in any international lending syndicate compared to the number of bondholders.
D)There are fewer FIs in any international lending syndicate compared to the number of bondholders and many international loan syndicates comprise the same groups of FIs, increasing the probability of consensus in case of rescheduling only.

Answer 3

D

Question 4

Multi-year restructuring agreement (MYRA) is the official term for the:

A)rescheduling of a sovereign loan.
B)repudiation of a sovereign loan.
C)repayment of a sovereign loan.
D)re-evaluation of a sovereign loan.

Question 5

Which of the following statements is true?

A)A lender wishing to provide funds to a borrower residing in a foreign country only needs to consider the credit quality of the borrower.
B)A lender wishing to provide funds to a borrower residing in a foreign country only needs to consider the sovereign risk quality of the country in which the borrower resides.
C)A lender wishing to provide funds to a borrower residing in a foreign country should consider either the credit quality of the borrower or the sovereign risk quality of the country in which the borrower resides.
D)A lender wishing to provide funds to a borrower residing in a foreign country should consider both the credit quality of the borrower and the sovereign risk quality of the country in which the borrower resides.

Question 6

Which of the following is not a country risk assessment service available to outside investors?

A)The Euromoney Index.
B)The Economist Intelligence Unit.
C)The Sovereign Risk Index.
D)The Institutional Investor Index.

Question 7

Which of the following statements is true?

A)The reason why debt rescheduling was more common than debt repudiation before WWII is because back then, international debt had predominantly taken the form of foreign bonds, while today it predominantly takes the form of bank loans.
B)The reason why debt rescheduling was more common than debt repudiation before WWII is because back then, international debt had predominantly taken the form of bank loans, while today it predominantly takes the form of foreign bonds.
C)The reason why debt repudiation was more common than debt rescheduling before WWII is because back then, international debt had predominantly taken the form of bank loans, while today it predominantly takes the form of foreign bonds.
D)The reason why debt repudiation was more common than debt rescheduling before WWII is because back then, international debt had predominantly taken the form of foreign bonds, while today it predominantly takes the form of bank loans.

Question 8

The term LIBOR stands for the London Interbank:

A)offered rate and is the rate charged on prime interbank loans on the Eurodollar market.
B)obligor rate and is the rate charged on prime interbank loans on the Eurodollar market.
C)offered rate and is the rate charged on interbank loans worldwide.
D)obligor rate and is the rate charged on interbank loans worldwide.

Question 9

What does MYRA refer to?

A)multi-year repayment agreement
B)multi-year refinancing agreement
C)multi-year renegotiating agreement
D)multi-year restructuring agreement

Question 10

Which of the following statements is true?

A)Governments and regulators seem to view the social costs of default on international bonds more worrisome than those on loans.
B)Governments and regulators seem to view the social costs of default on international bonds less worrisome than those on loans.
C)Governments and regulators seem to view the social costs of default on international bonds as worrisome as those on loans.
D)Governments and regulators have no view on the social costs of default on international bonds or loans.

Question 11

Which of the following is an adequate definition of a Brady bond?

A)A bond issued by a less developed country that is swapped for an outstanding loan by that country.
B)A bond issued by a less developed country that serves as collateral for an outstanding loan by that country.
C)A bond issued by a less developed country that is issued in accordance with the terms of the Brady convention of 1973.
D)A bond bought by a less developed country in order to stabilise the country's investments.

Question 12

Which of the following statements is true?

A)The investment ratio is the ratio of a country's total investments to its GDP.
B)The investment ratio is the ratio of a country's real investments to its total foreign currency obligations.
C)The investment ratio is the ratio of a country's total investments to its imports.
D)None of the listed options are correct.

Question 13

Which of the following statements is true in relation to the Economist Intelligence Unit?

A)The Economist Intelligence Unit rates country risk by combined economic and political risk on a maximum of 100 points scale.
B)The Economist Intelligence Unit rates the risk based on the spread in the Euromarket of the required interest rate on a country's debt over the LIBOR.
C)The Economist Intelligence Unit weighs subjective scores allocated by rating officers by the exposure of each bank to the country in question.
D)None of the listed options are correct.

Question 14

Which of the following statements is true?

A)The debt service ratio is the ratio of a country's interest and amortisation obligations to the value of its debt.
B)The debt service ratio is the ratio of a country's interest and amortisation obligations to the value of its assets.
C)The debt service ratio is the ratio of a country's interest and amortisation obligations to the value of its imports.
D)The debt service ratio is the ratio of a country's interest and amortisation obligations to the value of its exports.

Question 15

Changing the contractual terms of a loan, such as its maturity and interest payments is referred to as:

A)debt repudiation.
B)debt rescheduling.
C)refinancing.
D)reinvesting.

Question 16

Concessionality refers to the amount a bank gives up in:

A)future value terms as a result of a multi-year restructuring agreement (MYRA)..
B)nominal value terms as a result of a MYRA.
C)present value terms as a result of a MYRA.
D)compounded value terms as a result of a MYRA.

Question 17

HIPC stands for:

A)heavily import-focused poor countries.
B)heavily indebted poorest countries.
C)highly indebted productive countries.
D)heavily import-focused productive countries.

Question 18

Which of the following statements is true in relation to the Euromoney Index?

A)The Euromoney Index rates country risk by combined economic and political risk on a maximum of 100 points scale.
B)The Euromoney Index is based on the spread in the Euromarket of the required interest rate on a country's debt over the LIBOR, adjusted for the volume and maturity of the issue.
C)The Euromoney Index weighs subjective scores allocated by rating officers by the exposure of each bank to the country in question.
D)None of the listed options are correct.

Question 19

Debt moratorium refers to a:

A)clause that allows the lender to call in the debt during a particular period.
B)delay in repaying interest and/or principal on debt.
C)clause that allows the lender to charge higher interest if debt is not repaid in time.
D)clause that allows the borrower to repay debt early.

Question 20

Debt repudiation is the:

A)outright cancellation of all current debt obligations by a borrower.
B)outright cancellation of all future debt obligations by a borrower.
C)outright cancellation of all current and future debt obligations by a borrower.
D)changing of the contractual terms of all current debt obligations by a borrower.

Question 21

Which of the following are risk factors that might influence the variability of a country's export revenues?

A)quality risk
B)quantity risk
C)country risk
D)basis risk

Question 22

Which of the following expressions truly represents the calculation of a country's import ratio?

A)Total imports divided by total exports.
B)Total imports divided by total foreign currency exchange reserves.
C)Total imports divided by total debt.
D)Total imports divided by GDP.

Question 23

Which of the following are benefits that accrue to the lender resulting from rescheduling?

A)Increase of consumption.
B)Tax benefits.
C)Lower present value payments.
D)Loans become similar to long-term bonds

Question 24

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

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

Question 25

Which of the following countries was rated to be the riskiest according to the Institutional Investor's 2009 country credit risk ratings?

A)Eritrea
B)Zimbabwe
C)Afghanistan
D)North Korea

Question 26

Which of the following statements is true?

A)There should be a positive relationship between the size of a country's debt service ratio and the probability of rescheduling.
B)There should be a negative relationship between the size of a country's debt service ratio and the probability of rescheduling.
C)There should be no relationship between the size of a country's debt service ratio and the probability of rescheduling.
D)The relationship between the size of a country's debt service ratio and the probability of rescheduling depends on a set of variables relating to the borrowing country.

Question 27

Which of the following statements is true in relation to secondary markets for LDC debt?

A)LDC loans change hands when one creditor assigns the rights to all future payments and principal payments to a buyer, hence removing it from the balance sheet.
B)Liquidity in these markets is low, as the country whose debt is traded needs to consent to the transaction.
C)Prices for LCD debt are negotiated directly between the purchaser and the seller.
D)LDC loans change hands when one creditor assigns the rights to all future payments and principal payments to a buyer and prices for LCD debt are negotiated directly between the purchaser and the seller.

Question 28

Which of the following statements is true?

A)Debt-for-equity swap programs appear to enhance LCD debt prices.
B)Debt-for-equity swap programs appear to have no impact on LCD debt prices.
C)Debt-for-equity swap programs appear to depress LCD debt prices.
D)Debt-for-equity swaps are not available for traded LCD debt.

Question 29

Which of the following statements is true in relation to the Institutional Investor Index?

A)The Institutional Investor Index rates country risk by combined economic and political risk on a maximum of 100 points scale.
B)The Institutional Investor Index is based on the spread in the Euromarket of the required interest rate on a country's debt over the LIBOR.
C)The Institutional Investor Index weighs subjective scores allocated by rating officers by the exposure of each bank to the country in question.
D)None of the listed options are correct.

Question 30

Which of the following are potential problems associated with using credit scoring as a tool for assessing country risk?

A)Measurement of key variables.
B)Political risk factors and incentive aspects.
C)Political risk factors and portfolio aspects.
D)Measurement of key variables, political risk factors, portfolio aspects and incentive aspects.

Question 31

Which of the following statements is true?

A)The most common approach to evaluating country risk among large FIs is to develop sovereign country risk scoring models based on economic ratios for each country.
B)The most common approach to evaluating country risk among large FIs is to develop sovereign country risk scoring models based on political ratios for each country.
C)The most common approach to evaluating country risk among large FIs is to develop sovereign country risk scoring models based on industry performance ratios for each country.
D)The most common approach to evaluating country risk among large FIs is to develop sovereign country risk scoring models based on financial performance ratios for each country.

Question 32

Which of the following expressions truly represents the calculation of a country's debt service ratio?

A)(Interest plus amortisation) divided by exports.
B)(Interest plus amortisation) divided by imports.
C)(Interest plus amortisation) divided by foreign debt.
D)(Interest plus amortisation) divided by GDP.

Question 33

Which of the following statements is true?

A)There should be a positive relationship between the size of a country's investment ratio and the probability of rescheduling.
B)There should be a negative relationship between the size of a country's investment ratio and the probability of rescheduling.
C)There should be no relationship between the size of a country's investment ratio and the probability of rescheduling.
D)The relationship between the size of a country's investment ratio and the probability of rescheduling depends on a set of variables relating to the borrowing country.

Question 34

Which of the following statements is true?

A)There should be a positive relationship between domestic money supply growth and the probability of rescheduling.
B)There should be a negative relationship between domestic money supply growth and the probability of rescheduling.
C)There should be no relationship between domestic money supply growth and the probability of rescheduling.
D)The relationship between domestic money supply growth and the probability of rescheduling depends on a set of variables relating to the borrowing country.

Question 35

Which of these are major segments of the secondary market for LCD debt?

A)performing loans
B)sovereign bonds
C)non-performing loans
D)sovereign bonds, performing loans and non-performing loans

Question 36

Which of the following describes debt moratoria?

A)Delay in repaying interest and/or principal on debt because of government prohibition of such action.
B)Special reserves created on the balance sheet against which to write off bad loans.
C)The official terminology for a sovereign loan rescheduling.
D)Debt issued by an LDC that is swapped for an outstanding loan to that LDC.

Question 37

The investment ratio measures the degree to which a country is allocating resources to:

A)real investments rather than to consumption.
B)consumption rather than real investments.
C)real investments rather than debt repayments.
D)real debt repayments rather than to real investments.

Question 38

Which of the following statements is true in relation to the economic freedom index?

A)The economic freedom index includes measures such as prosperity rights regulation, capital flows and black market activities.
B)The economic freedom index measures a country's economic freedom on a scale of 1 to 5, whereby a scale of 5 implies policies most conducive to economic freedom, while a score of 1 implies the least conducive to economic freedom.
C)The economic freedom index measures a country's economic freedom on a scale of 1 to 10, whereby a scale of 1 implies policies most conducive to economic freedom, while a score of 10 implies the least conducive to economic freedom.
D)The economic freedom index does not exist.

Question 39

In accordance with the Heritage Foundation, which of the following definitions best represents the term 'economic freedom'?

A)The absence of government coercion or constraint on the production, distribution or consumption of goods and services at all costs to protect and maintain liberty itself.
B)The absence of government coercion or constraint on the production, distribution or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself.
C)The absence of government coercion or constraint on the consumption of goods and services at all costs to protect and maintain liberty itself.
D)The absence of government coercion or constraint on the production and distribution or consumption of goods and services at all costs to protect and maintain liberty itself.

Question 40

Which of the following statements is true?

A)There should be a positive relationship between the size of a country's variance of export revenue and the probability of rescheduling.
B)There should be a negative relationship between the size of a country's variance of export revenue and the probability of rescheduling.
C)There should be no relationship between the size of a country's variance of export revenue and the probability of rescheduling.
D)The relationship between the size of a country's variance of export revenue and the probability of rescheduling depends on a set of variables relating to the borrowing country.

Question 41

A possible reason for the high systematic risk of debt service ratio (DSR) is the:

A)tendency of world commodity prices to reflect non-similar economic conditions.
B)sensitivity of this ratio to rising nominal and real interest rates in the developed countries.
C)tendency of prices and world demands for commodities to reflect simultaneously economic conditions.
D)discretionary nature of money supply growth for LDC governments.

Question 42

Lenders considering lending money to a firm in another country only need to consider the firm's credit standing.

Question 43

Some factors that are built into Multi-year restructuring agreements (MYRAs) are:

A)option and guarantee features that don't allow the lender and buyer (borrower) to choose the currency for repayment of interest and principal.
B)option and guarantee features that allow the lender and buyer (borrower) to choose the currency for repayment of interest and principal.
C)the maturity of the loan is typically shortened to reduce interest and principal payments.
D)There are no fees charged for the restructuring of the loan.

Question 44

Which of the following is true of Brady bonds?

A)They are uncollateralised.
B)They have a shorter maturity and a higher than promised coupon (yield) than the original sovereign loans.
C)The benefit from Brady bond is the 'saving' from lower interest spreads required on such bonds.
D)Their value partly reflects the value of collateral underlying the principal and/or interest on the issue.

Question 45

Debt-for-equity swaps provide:

A)advantages to the less-developed country (LDC) in that they gain new debt in exchange for equity.
B)advantages to LDCs as they are able to acquire hard currency debt for local currency equity.
C)disadvantages to the LDC as they are able to retire expensive hard currency debt for local currency equity.
D)advantages to LDCs as they are able to retire expensive hard currency debt for local currency equity.

Question 46

Debt repudiations were more common before WWII compared to now.

Question 47

LDC debt can be bought and sold in secondary markets.

Question 48

A possible reason for the high systematic risk of export revenue variance (VAREX) is the:

A)tendency of world commodity prices to reflect non-similar economic conditions.
B)sensitivity of this ratio to rising nominal and real interest rates in the developed countries.
C)tendency of prices and world demands for commodities to reflect simultaneously economic conditions.
D)discretionary nature of money supply growth for LDC governments.

Question 49

The Heritage Foundation defines 'economic freedom' as 'the absence of government coercion or constraint on the production, distribution or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself'.

Question 50

The sovereign risk assessment methods most commonly used by large FIs are logit and probit models.

Question 51

Debt rescheduling is the least common form of sovereign risk event.

Question 52

One reason why debt rescheduling is easier than debt repudiation is that many international loan contracts contain cross-default provisions that serve to prevent a country from selecting a group of weak lenders for special default treatment.

Question 53

The Euromoney Index is based on the spread in the Euromarket of the required interest rate on a country's debt over the LIBOR.

Question 54

A possible reason for the high systematic risk of export revenue variance (VAREX) is the:

A)tendency of world commodity prices to reflect non-similar economic conditions.
B)sensitivity of this ratio to rising nominal and real interest rates in the developed countries.
C)tendency of prices and world demands for commodities to reflect simultaneously economic conditions.
D)discretionary nature of money supply growth for LDC governments.

Question 55

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

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)The FI may receive additional fees, collateral, and option features on the loan.

Question 56

Sovereign risk is largely independent of the credit standing of an individual borrower operating in that country.

Question 57

An FI would be most likely to lend to a country with a:

A)low debt service ratio.
B)high import ratio.
C)low investment ratio.
D)large variance of export revenue.

Question 58

Which of the following are normally traded at very deep discounts from 100 per cent?

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

Question 59

An LDC's export revenues may be highly variable due to quantity risk and price risk.

Question 60

Which of the following makes international loan rescheduling more likely than bond rescheduling?

A)International loan contracts are not allowed to contain cross-default provisions.
B)Typically there are more FIs in an international lending syndicate compared to the number of potential bondholders.
C)Since World War II more international debt has been in the form of bonds.
D)An international loan syndicate typically comprises the same FIs which allows greater cohesiveness for negotiations.

Question 61

Both buyers and sellers of LDC debt seem willing to participate in the LDC debt markets for the purpose of rebalancing the country risk exposure on their balance sheets.

Question 62

What are the costs and benefits of rescheduling for the lenders and for the borrowers?

Question 63

What are the major advantages and disadvantages of using scoring models to assess country risk?

Question 64

Explain the relationships between a country's probability of rescheduling and the country's: a) domestic money supply growth
B) debt service ratio
C) investment ratio
D) variance of export revenue

Question 65

All of the following are relevant determinants of sovereign risk exposure: the rate of domestic money supply growth; the variance of export revenue, and the size of the population.