Question 1

The export revenue variance (VAREX) ratio tends to have high systematic risk elements in a CRA analysis.

Accepted Answer

A) True 
 B)False

Question 2

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 3

Trading activity and investor confidence in foreign debt increased in the early 2000s.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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

Accepted Answer

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. 
E) All of these. 
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. 
E) All of these.

Question 6

High rates of domestic inflation impact the credit scoring model of sovereign country risk exposure through which of the following variables?

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 7

In international finance, the investment ratio is determined by dividing the value of real investment 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 8

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 9

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 10

Which of the following variables can have a negative impact on the probability of rescheduling in the credit scoring model 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 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 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Question 14

What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 75 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 15

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

Accepted Answer

A) True 
 B)False

Question 16

A possible reason for the high systematic risk of VAREX in LCDs and EMs is

Accepted Answer

A) the tendency of world commodity prices to reflect non-similar economic conditions. 
B) the sensitivity of this ratio to rising nominal and real interest rates in the developed, or lending, countries. 
C) the tendency of prices and world demands for commodities to reflect simultaneously economic conditions. 
D) the discretionary nature of money supply growth for LDC governments. 
E) different demands for imports, and wide differences in the scale of vital imports across LDCs. 
A) the tendency of world commodity prices to reflect non-similar economic conditions. 
B) the sensitivity of this ratio to rising nominal and real interest rates in the developed, or lending, countries. 
C) the tendency of prices and world demands for commodities to reflect simultaneously economic conditions. 
D) the discretionary nature of money supply growth for LDC governments. 
E) different demands for imports, and wide differences in the scale of vital imports across LDCs.

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following observations concerning loan 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 these. 
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 these.

Question 19

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 20

The following is an example of a credit scoring model to estimate the probability of debt rescheduling for country I: Pi = 0.25 DSRi + 0.17IRi - 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.
Two countries are identical in all respects except that country A's debt service ratio is 1.5, while country B's debt service ratio is 1.25, and country A's import ratio is 0.75, while country B's import ratio is 0.90. Based only on the effect of these two variables, compare the likely price of debt issued by country A to the likely price of debt issued by country B if both debt issues have the same maturity and coupon payments. Both debt issues are trading in the secondary market.

Accepted Answer

A)  Country B's debt is priced higher because the probability of rescheduling is lower for country B than for country A. 
B)  Country A's debt is priced higher because the probability of rescheduling is lower for country A than for country B. 
C)  Country B's debt is priced lower because country B has a lower probability of rescheduling than does country A. 
D)  Country A's debt is priced lower because country A has a lower probability of rescheduling than does country B. 
E)  Both debt issues have the same price. 
A)  Country B's debt is priced higher because the probability of rescheduling is lower for country B than for country A. 
B)  Country A's debt is priced higher because the probability of rescheduling is lower for country A than for country B. 
C)  Country B's debt is priced lower because country B has a lower probability of rescheduling than does country A. 
D)  Country A's debt is priced lower because country A has a lower probability of rescheduling than does country B. 
E)  Both debt issues have the same price.

Exam 14: Sovereign Risk

The export revenue variance (VAREX) ratio tends to have high systematic risk elements in a CRA analysis.

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

Trading activity and investor confidence in foreign debt increased in the early 2000s.

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

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

High rates of domestic inflation impact the credit scoring model of sovereign country risk exposure through which of the following variables?

In international finance, the investment ratio is determined by dividing the value of real investment by the

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?

Which of the following variables can have a negative impact on the probability of rescheduling in the credit scoring model to estimate sovereign country risk exposure?

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

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

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

What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 75 cents on the dollar? (choose the closest answer)

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

A possible reason for the high systematic risk of VAREX in LCDs and EMs is

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.

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

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

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