Question 1

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 2

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 3

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 4

The Euromoney Country Risk 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. 
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.

Question 5

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. 
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.

Question 6

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. 
A) The debt service ratio. 
B) The import ratio. 
C) The variance of export revenue. 
D) The investment ratio.

Question 7

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. 
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.

Question 8

The following is an example of a credit scoring model to estimate the probability of debt rescheduling:

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 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. 
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.

Question 9

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. 
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.

Question 10

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 11

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

Question 12

Lenders may find it costly to reschedule non-accruing sovereign country debt because

Accepted Answer

A) it is politically embarrassing. 
B) of tax reasons. 
C) they might be subject to greater regulatory attention. 
D) it is detrimental to maintaining good customer relations. 
A) it is politically embarrassing. 
B) of tax reasons. 
C) they might be subject to greater regulatory attention. 
D) it is detrimental to maintaining good customer relations.

Question 13

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

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 the LCD and EM debt markets,sovereign bonds have historically been issued in foreign currencies.

Accepted Answer

A) True 
 B)False

Question 16

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 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 17

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. 
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.

Question 18

A possible reason for the high systematic risk of the debt service ratio (DSR)in LDCs 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. 
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.

Question 19

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 20

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. 
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.

Exam 14: Sovereign Risk

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

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

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.

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

Which of the following describes debt rescheduling?

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

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

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?

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.

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

Lenders may find it costly to reschedule non-accruing sovereign country debt because

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

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

In the LCD and EM debt markets,sovereign bonds have historically been issued in foreign currencies.

Which of the following is true of Brady bonds?

A possible reason for the high systematic risk of the debt service ratio (DSR)in LDCs and EMs is

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

Which of the following describes debt repudiation?

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