Question 1

A lending decision to a firm in a foreign country should involve both a credit risk analysis and a sovereign risk analysis.

Accepted Answer

A) True 
 B)False

Question 2

The statistical results of the country risk analysis models

Accepted Answer

A) may have limited usefulness if parameters are unstable. 
B) are not subject to estimation error. 
C) cannot be extrapolated to influence financial decision making. 
D) are theoretical depictions of underlying relationships. 
E) should not change over time. 
A) may have limited usefulness if parameters are unstable. 
B) are not subject to estimation error. 
C) cannot be extrapolated to influence financial decision making. 
D) are theoretical depictions of underlying relationships. 
E) should not change over time.

Question 3

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.
According to this credit scoring model, the variable that has the highest positive impact on the probability of rescheduling is

Accepted Answer

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

Question 4

Which of the following describes debt rescheduling?

Accepted Answer

A) Outright cancellation of all current and future debt obligations. 
B) Changing the contractual terms of a loan, such as its maturity and interest payments. 
C) Direct nationalization of private sector assets. 
D) Automatic default of all international loans upon default of any one loan. 
E) Debt conversion schemes of debtor countries that signal creditworthiness. 
A) Outright cancellation of all current and future debt obligations. 
B) Changing the contractual terms of a loan, such as its maturity and interest payments. 
C) Direct nationalization of private sector assets. 
D) Automatic default of all international loans upon default of any one loan. 
E) Debt conversion schemes of debtor countries that signal creditworthiness.

Question 5

What is the approximate yield on a 20-year 10 percent annual coupon less developed country (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.

Question 6

During 2014, Argentina defaulted on government debt and also passed legislation that led to default on $30 billion of corporate debt owed to foreign creditors.

Accepted Answer

A) True 
 B)False

Question 7

Rescheduling may cause the borrower to lose future borrowing opportunities for investment projects.

Accepted Answer

A) True 
 B)False

Question 8

Debt rescheduling is considered a rare form of sovereign risk event.

Accepted Answer

A) True 
 B)False

Question 9

Export revenue may be highly variable due to the quantity of exports and the prices that may be realized on the exported products.

Accepted Answer

A) True 
 B)False

Question 10

One cost of rescheduling for a lender is the potential placement of the lender on a regulatory watch or problem list.

Accepted Answer

A) True 
 B)False

Question 11

Prior to World War II, most international debt was in the form of bank loans.

Accepted Answer

A) True 
 B)False

Question 12

In international finance, the investment ratio measures the amount of real investment relative to the gross national product of the country.

Accepted Answer

A) True 
 B)False

Question 13

A positive relationship is considered to exist between domestic money supply growth and the probability of rescheduling debt.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is true of Brady bonds?

Accepted Answer

A) They are uncollateralized. 
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. 
E) Their value fully reflects the credit risk rating of the country issuing the bonds. 
A) They are uncollateralized. 
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. 
E) Their value fully reflects the credit risk rating of the country issuing the bonds.

Question 15

When making a loan decision to a foreign party, an FI should consider sovereign risk above credit risk.

Accepted Answer

A) True 
 B)False

Question 16

Performing loans in the LDC debt market are loans on which the foreign country is making promised payments.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements regarding total debt service ratio (TDSR) are untrue?

Accepted Answer

A) TDSR = total debt services minus exports 
B) The ratio of a country's principal repayments and interest paid to the value of its exports. 
C) The larger the debt repayments are in relation to export revenues, the greater the probability that the country will have to reschedule its debt. 
D) There should be a positive relationship between the size of the total debt service ratio and the probability of rescheduling. 
E) None of the statements are untrue. 
A) TDSR = total debt services minus exports 
B) The ratio of a country's principal repayments and interest paid to the value of its exports. 
C) The larger the debt repayments are in relation to export revenues, the greater the probability that the country will have to reschedule its debt. 
D) There should be a positive relationship between the size of the total debt service ratio and the probability of rescheduling. 
E) None of the statements are untrue.

Question 18

Lenders may find it beneficial to reschedule sovereign country debt

Accepted Answer

A) to avoid political embarrassment. 
B) for tax reasons. 
C) to avoid marking the balance sheet to market. 
D) to maintain good customer relations. 
E) to keep from going bankrupt. 
A) to avoid political embarrassment. 
B) for tax reasons. 
C) to avoid marking the balance sheet to market. 
D) to maintain good customer relations. 
E) to keep from going bankrupt.

Question 19

Investors are willing to purchase rescheduled less developed country (LDC) and emerging market (EM) debt because of

Accepted Answer

A) political pressure. 
B) the potential for capital gains. 
C) tax considerations. 
D) side payments from FIs. 
E) misinformation. 
A) political pressure. 
B) the potential for capital gains. 
C) tax considerations. 
D) side payments from FIs. 
E) misinformation.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 14: Sovereign Risk

A lending decision to a firm in a foreign country should involve both a credit risk analysis and a sovereign risk analysis.

The statistical results of the country risk analysis models

Which of the following describes debt rescheduling?

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

During 2014, Argentina defaulted on government debt and also passed legislation that led to default on $30 billion of corporate debt owed to foreign creditors.

Rescheduling may cause the borrower to lose future borrowing opportunities for investment projects.

Debt rescheduling is considered a rare form of sovereign risk event.

Export revenue may be highly variable due to the quantity of exports and the prices that may be realized on the exported products.

One cost of rescheduling for a lender is the potential placement of the lender on a regulatory watch or problem list.

Prior to World War II, most international debt was in the form of bank loans.

In international finance, the investment ratio measures the amount of real investment relative to the gross national product of the country.

A positive relationship is considered to exist between domestic money supply growth and the probability of rescheduling debt.

Which of the following is true of Brady bonds?

When making a loan decision to a foreign party, an FI should consider sovereign risk above credit risk.

Performing loans in the LDC debt market are loans on which the foreign country is making promised payments.

Which of the following statements regarding total debt service ratio (TDSR) are untrue?

Lenders may find it beneficial to reschedule sovereign country debt

Investors are willing to purchase rescheduled less developed country (LDC) and emerging market (EM) debt because of

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

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