Question 1

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 2

For any given country risk variable,the greater the size of the systematic risk relative to the unsystematic risk,the less important the variable is to the lender.

Accepted Answer

A) True 
 B)False

Question 3

FIs that lend to foreign entities often need to make provisions to their loan loss reserves.

Accepted Answer

A) True 
 B)False

Question 4

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 country I is providing several incentives to increase domestic savings?

Accepted Answer

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

Question 5

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 6

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.

If two countries are identical in all respects except that country A's debt service ratio is 1.5,country B's debt service ratio is 1.25,country A's import ratio is 0.75,and country B's import ratio is 0.90,which country poses the least sovereign country risk?

Accepted Answer

A) Country A,because the higher debt service ratio's negative impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
B) Country B,because the higher debt service ratio's negative impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
C) Country A,because the higher debt service ratio's positive impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
D) Country B,because the lower debt service ratio's impact outweighs the higher import ratio's impact on the country risk exposure. 
A) Country A,because the higher debt service ratio's negative impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
B) Country B,because the higher debt service ratio's negative impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
C) Country A,because the higher debt service ratio's positive impact on the country's risk exposure outweighs the impact of the lower import ratio effect. 
D) Country B,because the lower debt service ratio's impact outweighs the higher import ratio's impact on the country risk exposure.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 "savings" 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. 
A) They are bonds backed by collateral. 
B) Brady bonds are replacing them because of their higher interest rates. 
C) Their benefit is the "savings" 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.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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. 
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.

Question 12

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 13

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 14

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. 
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.

Question 15

Investors are willing to purchase rescheduled less developed country (LDC)and emerging market (EM)debt because of

Accepted Answer

A) political pressure. 
B) the potential for capital gains. 
C) tax considerations. 
D) side payments from FIs. 
A) political pressure. 
B) the potential for capital gains. 
C) tax considerations. 
D) side payments from FIs.

Question 16

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 17

Through June of 2012,the cost of bailouts required to keep Greece's reform efforts moving forward and to remain part of the European Union totaled more than $480 billion.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) The FI may receive tax benefits. 
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. 
A) The FI may receive tax benefits. 
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.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is NOT a segment in the secondary market for sovereign debt?

Accepted Answer

A) Restructured loans. 
B) Brady bonds. 
C) Sovereign bonds. 
D) Performing loans. 
A) Restructured loans. 
B) Brady bonds. 
C) Sovereign bonds. 
D) Performing loans.

Exam 14: Sovereign Risk

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.

For any given country risk variable,the greater the size of the systematic risk relative to the unsystematic risk,the less important the variable is to the lender.

FIs that lend to foreign entities often need to make provisions to their loan loss reserves.

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

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

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 sovereign bonds?

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

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

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

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

The statistical results of the country risk analysis models

Investors are willing to purchase rescheduled less developed country (LDC)and emerging market (EM)debt because of

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

Through June of 2012,the cost of bailouts required to keep Greece's reform efforts moving forward and to remain part of the European Union totaled more than $480 billion.

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

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

Which of the following is NOT a segment in the secondary market for sovereign debt?

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