Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Buyers of LDC debt in secondary markets typically are large FIs who are willing to accept write-downs of loans on their balance sheets.

Accepted Answer

A) True 
 B)False

Question 3

Making a lending decision to a party residing in a foreign country is a two-step decision.What are the two steps involved in such a decision?

Accepted Answer

A) Assessing credit quality of the borrower and sovereign risk quality of the borrower's country. 
B) Assessing political economy risk and exogenous risks. 
C) Assessing sovereign risk quality of the borrower's country and other country risks. 
D) Rescheduling of existing loans and deciding on the terms for new loans. 
E) Assessing the foreign exchange risk involved and the security that can be provided by the borrower. 
A) Assessing credit quality of the borrower and sovereign risk quality of the borrower's country. 
B) Assessing political economy risk and exogenous risks. 
C) Assessing sovereign risk quality of the borrower's country and other country risks. 
D) Rescheduling of existing loans and deciding on the terms for new loans. 
E) Assessing the foreign exchange risk involved and the security that can be provided by the borrower.

Question 4

The relationship of this variable with the probability of rescheduling is often disputed.

Accepted Answer

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

Question 5

Commodity price and quantity risk is measured by which of the following variables in the credit scoring model to estimate sovereign country risk exposure?

Accepted Answer

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

Question 6

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

Question 7

Sovereign country risk exposure is a result of the FI's inability to be fully diversified.

Accepted Answer

A) True 
 B)False

Question 8

Both the total debt service ratio and the import ratio typically have low systematic risk elements in a country risk analysis (CRA).

Accepted Answer

A) True 
 B)False

Question 9

FIs that lend to foreign entities often need to make provisions to their loan loss reserves.

Accepted Answer

A) True 
 B)False

Question 10

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

Question 11

In international finance, the variance of export revenue is based solely on the quantity of product available for export.

Accepted Answer

A) True 
 B)False

Question 12

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

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 13

The advantage to the lender (purchaser) of a Brady bond versus a loan to a foreign country is that U.S.Treasury bonds serve as collateral for Brady bonds.

Accepted Answer

A) True 
 B)False

Question 14

Each of the variables in the credit scoring model of sovereign country risk

Accepted Answer

A) cannot be measured independently. 
B) has a systematic and unsystematic component. 
C) has a predictable and an unpredictable component. 
D) is determined by a weighted risk index. 
E) has a high systematic risk element. 
A) cannot be measured independently. 
B) has a systematic and unsystematic component. 
C) has a predictable and an unpredictable component. 
D) is determined by a weighted risk index. 
E) has a high systematic risk element.

Question 15

Which of the following is true of sovereign bonds?

Accepted Answer

A) They are bonds backed by collateral. 
B) Brady bonds are replacing them because of their higher interest rates. 
C) Their benefit is the "savings" from not having to pledge U.S.Treasury bonds as collateral. 
D) Their value partly reflects the value of collateral underlying the principal and/or interest on the issue. 
E) They are not a segment in the secondary market for sovereign debt. 
A) They are bonds backed by collateral. 
B) Brady bonds are replacing them because of their higher interest rates. 
C) Their benefit is the "savings" from not having to pledge U.S.Treasury bonds as collateral. 
D) Their value partly reflects the value of collateral underlying the principal and/or interest on the issue. 
E) They are not a segment in the secondary market for sovereign debt.

Question 16

The following is an example of a credit scoring model to estimate the probability of debt rescheduling: Pi= 0.25DSRi + 0.17IRi − 0.03 INVRi + 0.84VAREXi + 0.93 MGi
Where Pi is the probability of rescheduling country I's debt; DSR is the country's total 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.
Two countries are identical in all respects except that country A's rate of growth of the domestic money supply (MG) is 33 percent, while country B's MG is 25 percent, and country A's variance of export revenue (VAREX) is 3.75 percent, while country B's VAREX is 10 percent.Based only on these two variables, which country possesses the most sovereign country risk?

Accepted Answer

A) Country A because the higher rate of money supply growth is insufficient to overcome the impact of a lower export revenue variance on country risk exposure. 
B) Country B because the higher rate of money supply growth has less impact on country risk exposure than the impact of a lower export revenue variance. 
C) Country A because the higher rate of money supply growth is sufficient to overcome the impact of a higher export revenue variance on country risk exposure. 
D) Country B because the higher rate of money supply growth has a positive impact on country risk that outweighs the impact of a lower export revenue variance. 
E) They both have the same sovereign country risk exposure. 
A) Country A because the higher rate of money supply growth is insufficient to overcome the impact of a lower export revenue variance on country risk exposure. 
B) Country B because the higher rate of money supply growth has less impact on country risk exposure than the impact of a lower export revenue variance. 
C) Country A because the higher rate of money supply growth is sufficient to overcome the impact of a higher export revenue variance on country risk exposure. 
D) Country B because the higher rate of money supply growth has a positive impact on country risk that outweighs the impact of a lower export revenue variance. 
E) They both have the same sovereign country risk exposure.

Question 17

International bond finance is more likely to be rescheduled than international loan finance because of the relatively fewer lenders involved with a loan finance issue.

Accepted Answer

A) True 
 B)False

Question 18

The following is an example of a credit scoring model to estimate the probability of debt rescheduling for country I: Pi= 0.25DSRi+ 0.17IRi- 0.03 INVRi+ 0.84VAREXi+ 0.93 MGi
Where Pi is the probability of rescheduling country I's debt; DSR is the country's total 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.
What is an important determinant of rescheduling probability if inflation is a prime concern?

Accepted Answer

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

Question 19

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 20

The Economist Intelligence Unit is a rating of sovereign risk based on economic and political risk within a country.

Accepted Answer

A) True 
 B)False

Exam 14: Sovereign Risk

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

Buyers of LDC debt in secondary markets typically are large FIs who are willing to accept write-downs of loans on their balance sheets.

Making a lending decision to a party residing in a foreign country is a two-step decision.What are the two steps involved in such a decision?

The relationship of this variable with the probability of rescheduling is often disputed.

Commodity price and quantity risk is measured by which of the following variables in the credit scoring model to estimate sovereign country risk exposure?

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

Sovereign country risk exposure is a result of the FI's inability to be fully diversified.

Both the total debt service ratio and the import ratio typically have low systematic risk elements in a country risk analysis (CRA).

FIs that lend to foreign entities often need to make provisions to their loan loss reserves.

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?

In international finance, the variance of export revenue is based solely on the quantity of product available for export.

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

The advantage to the lender (purchaser) of a Brady bond versus a loan to a foreign country is that U.S.Treasury bonds serve as collateral for Brady bonds.

Each of the variables in the credit scoring model of sovereign country risk

Which of the following is true of sovereign bonds?

International bond finance is more likely to be rescheduled than international loan finance because of the relatively fewer lenders involved with a loan finance issue.

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.

The Economist Intelligence Unit is a rating of sovereign risk based on economic and political risk within a country.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters