Question 1

Which of the following is NOT a reason why international loans are more likely to be rescheduled than international bonds?

Accepted Answer

A) Governments appear to view the social costs of default on bonds as less critical than on loans. 
B) Many international loan contracts contain cross-default provisions that automatically put into default all loans by that country in the case of one default. 
C) Banks receive no subsidies from major governments to make international loans. 
D) Many international loan syndicates contain the same group of banks which increases the cohesiveness of loan renegotiations. 
E) Renegotiation of loans is easier because there are fewer banks in loan syndication than there are bondholders in a debt offering. 
A) Governments appear to view the social costs of default on bonds as less critical than on loans. 
B) Many international loan contracts contain cross-default provisions that automatically put into default all loans by that country in the case of one default. 
C) Banks receive no subsidies from major governments to make international loans. 
D) Many international loan syndicates contain the same group of banks which increases the cohesiveness of loan renegotiations. 
E) Renegotiation of loans is easier because there are fewer banks in loan syndication than there are bondholders in a debt offering.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Lending to a foreign party is a two-step decision involving both sovereign risk and interest rate risk.

Accepted Answer

A) True 
 B)False

Question 4

Sovereign country risk is largely independent of the credit standing of the foreign borrower.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following observations concerning international loan cross-default provisions is NOT true?

Accepted Answer

A) They ensure that if a country defaults on just one of its loans, all its other outstanding loans would automatically be put into default as well. 
B) They prevent a country from selecting a group of weak lenders for special default treatment. 
C) They make the outcome of any individual loan default decision potentially very costly for the borrower. 
D) They protect strong lenders in any loan default by guaranteeing the repayment of such defaulted loans. 
E) None of the options. 
A) They ensure that if a country defaults on just one of its loans, all its other outstanding loans would automatically be put into default as well. 
B) They prevent a country from selecting a group of weak lenders for special default treatment. 
C) They make the outcome of any individual loan default decision potentially very costly for the borrower. 
D) They protect strong lenders in any loan default by guaranteeing the repayment of such defaulted loans. 
E) None of the options.

Question 6

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 7

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 8

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 9

Sellers of LDC debt in secondary markets include small FIs wishing to disengage themselves from the LDC market.

Accepted Answer

A) True 
 B)False

Question 10

The export revenue variance (VAREX) should be negatively related to the probability of debt rescheduling.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following describes debt repudiation?

Accepted Answer

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

Question 12

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 country I is providing several incentives to increase domestic savings?

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 13

Which is NOT a key economic ratio in credit scoring models to estimate sovereign country risk exposure?

Accepted Answer

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

Question 14

Country risk analysis (CRA) statistical credit scoring models are very adept at capturing political risk events such as strikes, elections, corruption, etc.

Accepted Answer

A) True 
 B)False

Question 15

In international finance, the import ratio is determined by dividing the value of imports by the

Accepted Answer

A) total foreign exchange reserves. 
B) real investment. 
C) gross national product. 
D) value of exports. 
E) money supply. 
A) total foreign exchange reserves. 
B) real investment. 
C) gross national product. 
D) value of exports. 
E) money supply.

Question 16

Country risk analysis (CRA) statistical credit scoring models have difficulty measuring political risk events.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) True 
 B)False

Exam 14: Sovereign Risk

Which of the following is NOT a reason why international loans are more likely to be rescheduled than international bonds?

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

Lending to a foreign party is a two-step decision involving both sovereign risk and interest rate risk.

Sovereign country risk is largely independent of the credit standing of the foreign borrower.

Which of the following observations concerning international loan cross-default provisions is NOT true?

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

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 NOT a segment in the secondary market for sovereign debt?

Sellers of LDC debt in secondary markets include small FIs wishing to disengage themselves from the LDC market.

The export revenue variance (VAREX) should be negatively related to the probability of debt rescheduling.

Which of the following describes debt repudiation?

Which is NOT a key economic ratio in credit scoring models to estimate sovereign country risk exposure?

Country risk analysis (CRA) statistical credit scoring models are very adept at capturing political risk events such as strikes, elections, corruption, etc.

In international finance, the import ratio is determined by dividing the value of imports by the

Country risk analysis (CRA) statistical credit scoring models have difficulty measuring political risk events.

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.

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