Question 1

International loan contracts that contain cross-default provisions allow the country to select specific lenders for special default treatment.

Accepted Answer

A) True 
 B)False

Question 2

One advantage of swapping a sovereign loan for a bond is the capability to sell the bond in the secondary market.

Accepted Answer

A) True 
 B)False

Question 3

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 subsidization 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 subsidization 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 4

The debt service ratio of a country should be negatively related to the probability of rescheduling.

Accepted Answer

A) True 
 B)False

Question 5

Lenders often are willing to reschedule debt payments to avoid forcing the borrower into outright bankruptcy.

Accepted Answer

A) True 
 B)False

Question 6

In international finance, the debt service ratio is found by dividing interest and amortization payments 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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

CRA statistical credit scoring models have difficulty measuring political risk events.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 "saving" 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 "saving" 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 13

In the statistical modeling of the country risk analysis, the investment ratio is considered to have a negative impact on the probability of rescheduling because the larger expenditures on investment infrastructure leaves less funds for debt payment.

Accepted Answer

A) True 
 B)False

Question 14

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 15

The following is an example of a credit scoring model to estimate the probability of debt rescheduling for country I: Pi = 0.25 DSRi + 0.17 IRi - 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.
What is an important determinant of rescheduling probability if inflation is a prime concern?

Accepted Answer

A) The 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 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 16

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

Question 17

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 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 18

Buyers are willing to purchase rescheduled LDC and 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 19

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

Accepted Answer

A) True 
 B)False

Question 20

By rescheduling its debt, a borrower raises the present value of its future payments in hard currencies.

Accepted Answer

A) True 
 B)False

Exam 14: Sovereign Risk

International loan contracts that contain cross-default provisions allow the country to select specific lenders for special default treatment.

One advantage of swapping a sovereign loan for a bond is the capability to sell the bond in the secondary market.

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

The debt service ratio of a country should be negatively related to the probability of rescheduling.

Lenders often are willing to reschedule debt payments to avoid forcing the borrower into outright bankruptcy.

In international finance, the debt service ratio is found by dividing interest and amortization payments by the

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

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

Which of the following describes debt rescheduling?

CRA statistical credit scoring models have difficulty measuring political risk events.

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

Which of the following is true of sovereign bonds?

In the statistical modeling of the country risk analysis, the investment ratio is considered to have a negative impact on the probability of rescheduling because the larger expenditures on investment infrastructure leaves less funds for debt payment.

Lenders may find it beneficial to reschedule sovereign country debt

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.

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

Buyers are willing to purchase rescheduled LDC and EM debt because of

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

By rescheduling its debt, a borrower raises the present value of its future payments in hard currencies.

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