Question 1

Which of the following describes debt moratoria?

Accepted Answer

A) Delay in repaying interest and/or principal on debt because of government prohibition of such action. 
B) Special reserves created on the balance sheet against which to write off bad loans. 
C) The official terminology for a sovereign loan rescheduling. 
D) Debt issued by a country that is swapped for an outstanding loan to that same country. 
E) Changing the contractual terms of a loan, such as its maturity and interest payments. 
A) Delay in repaying interest and/or principal on debt because of government prohibition of such action. 
B) Special reserves created on the balance sheet against which to write off bad loans. 
C) The official terminology for a sovereign loan rescheduling. 
D) Debt issued by a country that is swapped for an outstanding loan to that same country. 
E) Changing the contractual terms of a loan, such as its maturity and interest payments.

Question 2

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

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 3

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 4

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 5

The Euromoney Index for a given country currently is based on the

Accepted Answer

A) spread of the required interest rate on that country's debt over LIBOR. 
B) a number of economic and political factors specifically weighted according to their relative importance in determining country risk problems. 
C) a combined economic and political risk survey of economists and political analysts presented on a 100-point scale. 
D) surveys of the loan officers of major multinational banks. 
E) historical default rates of that country's loans. 
A) spread of the required interest rate on that country's debt over LIBOR. 
B) a number of economic and political factors specifically weighted according to their relative importance in determining country risk problems. 
C) a combined economic and political risk survey of economists and political analysts presented on a 100-point scale. 
D) surveys of the loan officers of major multinational banks. 
E) historical default rates of that country's loans.

Question 6

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 7

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.
According to this model, An FI would be most likely to lend to a country with

Accepted Answer

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

Question 8

Which of the following is an example of an exogenous risk?

Accepted Answer

A) Blocking reform implementation. 
B) Regional economic crisis. 
C) Increase in political instability. 
D) Social tensions that undermine implementation of reforms. 
E) Reversing of reform actions by powerful interest groups. 
A) Blocking reform implementation. 
B) Regional economic crisis. 
C) Increase in political instability. 
D) Social tensions that undermine implementation of reforms. 
E) Reversing of reform actions by powerful interest groups.

Question 9

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

Accepted Answer

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

Question 10

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 11

Sovereign risk involves restrictions placed on borrowers and investors regarding the movement of funds into and out of a foreign country.

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

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

Accepted Answer

A) True 
 B)False

Question 14

The advantage to the borrowing country of a Brady bond versus a loan from an FI is the much longer maturity and thus the lower payment schedule of a Brady bond.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 17

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 18

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 19

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.
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, compare the prices of debt issued by country A to the price of debt issued by country B if both 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 A than for B. 
B)  Country A's debt is priced higher because the probability of rescheduling is lower for country A than does 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 higher 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 A than for B. 
B)  Country A's debt is priced higher because the probability of rescheduling is lower for country A than does 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 higher probability of rescheduling than does country B. 
E)  Both debt issues have the same price.

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 + 0.17 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.
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.

Exam 14: Sovereign Risk

Which of the following describes debt moratoria?

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

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

Which of the following is true of Brady bonds?

The Euromoney Index for a given country currently is based on the

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

Which of the following is an example of an exogenous risk?

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?

Sovereign risk involves restrictions placed on borrowers and investors regarding the movement of funds into and out of a foreign country.

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

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

The advantage to the borrowing country of a Brady bond versus a loan from an FI is the much longer maturity and thus the lower payment schedule of a Brady bond.

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.

The statistical results of the country risk analysis models

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

Which of the following describes debt repudiation?

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