Exam 14: Sovereign Risk

The following is an example of a credit scoring model to estimate the probability of debt rescheduling: P_i = 0.25DSR_i + 0.17IR_i - 0.03 INVR_i + 0.84VAREX_i + 0.93 MG_i Where P_i is 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.

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.

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

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?

A foreign government's decision to keep a domestic corporation from making debt payments to outside investors automatically makes the corporation a bad credit risk for the investor.

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

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

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)

From the perspective of the lending FI,the risk of a well-diversified portfolio of loans should be less than weighted average risk of the individual loans.

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

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

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

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

As recent economic conditions improved,trading volumes in the secondary market for LCD and EM debt reached approximately $6.5 trillion in 2011.

Lenders may find it beneficial to reschedule sovereign country debt

The following is an example of a credit scoring model to estimate the probability of debt rescheduling: P_i = 0.25DSR_i + 0.17IR_i - 0.03 INVR_i + 0.84VAREX_i + 0.93 MG_i Where P_i is 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.

Multiyear restructuring agreements (MYRAs)involves the rescheduling of debt payments of foreign governments.

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

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

The advantage to the lender (purchaser)of a Brady bond versus a loan to a foreign country is that U.S.Treasury bonds serve as collateral for Brady bonds.