Question 1

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. 
E) different demands for imports, and wide differences in the scale of vital imports across LDCs. 
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. 
E) different demands for imports, and wide differences in the scale of vital imports across LDCs. B

Question 2

The allocation of country resources between present and future consumption is measured by which of the following variables of the credit scoring model of 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. D

Question 3

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. B

Question 4

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 5

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 6

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 7

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 8

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

Question 9

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 10

The larger the import ratio of a country; the higher is the probability that the country will have to schedule its debt payments.

Accepted Answer

A) True 
 B)False

Question 11

Traditional country risk analysis (CRA) that is based on discriminant statistical models often suffers from problems of using data that is not current.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

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 15

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.

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is an attempt to measure the absence of governmental constraint on the production, consumption, and distribution of goods?

Accepted Answer

A) Euromoney Index. 
B) Index of Economic Freedom. 
C) Corruption Perceptions Index. 
D) Economist Intelligence Unit. 
E) Institutional Investor Index. 
A) Euromoney Index. 
B) Index of Economic Freedom. 
C) Corruption Perceptions Index. 
D) Economist Intelligence Unit. 
E) Institutional Investor Index.

Question 19

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 20

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

Exam 14: Sovereign Risk

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

The allocation of country resources between present and future consumption is measured by which of the following variables of the credit scoring model of sovereign country risk exposure?

Which of the following describes debt rescheduling?

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

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

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

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

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

Which of the following is true of Brady bonds?

The larger the import ratio of a country; the higher is the probability that the country will have to schedule its debt payments.

Traditional country risk analysis (CRA) that is based on discriminant statistical models often suffers from problems of using data that is not current.

Lenders may find it beneficial to reschedule sovereign country debt

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

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

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.

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

Which of the following is an attempt to measure the absence of governmental constraint on the production, consumption, and distribution of goods?

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

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

Why Are Financial Institutions Special

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Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

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Options, Caps, Floors, and Collars

Swaps

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