Question 1

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. 
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 2

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. 
E) The FI may receive additional fees, collateral, and option features on the loan. 
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. 
E) The FI may receive additional fees, collateral, and option features on the loan.

Question 3

What are the expected end-of-year profits or losses if the bank hedges its interest rate risk exposure using the swap?

Accepted Answer

A)  The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
B)  The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
C)  The bank expects to earn $0.45 million in the first year, lose $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
D)  The bank expects to earn $0.45 million in the first year and lose $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
E)  The bank will not do the swap because it has no interest rate risk exposure.
Reason: First year cash flow: Fixed-rate payer pays $0.45 million (4.95 - 4.5) to floating rate payer. Second year cash flow: Floating-rate payer pays $0.58 million (5.53 - 4.95) to fixed rate payer. 
A)  The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
B)  The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
C)  The bank expects to earn $0.45 million in the first year, lose $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
D)  The bank expects to earn $0.45 million in the first year and lose $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
E)  The bank will not do the swap because it has no interest rate risk exposure.
Reason: First year cash flow: Fixed-rate payer pays $0.45 million (4.95 - 4.5) to floating rate payer. Second year cash flow: Floating-rate payer pays $0.58 million (5.53 - 4.95) to fixed rate payer.

Question 4

In exchange for the loss of some present value of the interest and principal on a loan after a rescheduling, the lender avoids the permanent loss that would result from a default.

Accepted Answer

A) True 
 B)False

Question 5

Sovereign country risk exposure is a result of the FI's inability to be fully diversified.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following observations concerning loan default provisions is NOT true?

Accepted Answer

A) They ensure that if a country defaults on just one of its loans, all its other outstanding loans would automatically be put into default as well. 
B) They prevent a country from selecting a group of weak lenders for special default treatment. 
C) They make the outcome of any individual loan default decision potentially very costly for the borrower. 
D) They protect strong lenders in any loan default by guaranteeing the repayment of such defaulted loans. 
E) None of the above. 
A) They ensure that if a country defaults on just one of its loans, all its other outstanding loans would automatically be put into default as well. 
B) They prevent a country from selecting a group of weak lenders for special default treatment. 
C) They make the outcome of any individual loan default decision potentially very costly for the borrower. 
D) They protect strong lenders in any loan default by guaranteeing the repayment of such defaulted loans. 
E) None of the above.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

A positive relationship is considered to exist between domestic money supply growth and the probability of rescheduling debt.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Both buyers and sellers of LDC debt seem willing to participate in the LDC debt markets for the purpose of rebalancing the country risk exposure on their balance sheets.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

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

Accepted Answer

A) True 
 B)False

Question 15

What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 25 cents on the dollar? (choose the closest answer)

Accepted Answer

A) 10 percent. 
B) 40 percent. 
C) 14 percent. 
D) 25 percent. 
E) Cannot be determined. 
A) 10 percent. 
B) 40 percent. 
C) 14 percent. 
D) 25 percent. 
E) Cannot be determined.

Question 16

Trading activity and investor confidence in foreign debt increased in the early 2000s.

Accepted Answer

A) True 
 B)False

Question 17

The debt service ratio of a country should be negatively related to the probability of rescheduling.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Which is NOT a key economic ratio in credit scoring models 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 discount on rescheduled debt. 
E) Domestic money supply growth. 
A) The debt service ratio. 
B) The import ratio. 
C) The variance of export revenue. 
D) The discount on rescheduled debt. 
E) Domestic money supply growth.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 14: Sovereign Risk

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

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

What are the expected end-of-year profits or losses if the bank hedges its interest rate risk exposure using the swap?

In exchange for the loss of some present value of the interest and principal on a loan after a rescheduling, the lender avoids the permanent loss that would result from a default.

Sovereign country risk exposure is a result of the FI's inability to be fully diversified.

Which of the following observations concerning loan default provisions is NOT true?

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

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

A positive relationship is considered to exist between domestic money supply growth and the probability of rescheduling debt.

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.

Both buyers and sellers of LDC debt seem willing to participate in the LDC debt markets for the purpose of rebalancing the country risk exposure on their balance sheets.

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

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

What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 25 cents on the dollar? (choose the closest answer)

Trading activity and investor confidence in foreign debt increased in the early 2000s.

The debt service ratio of a country should be negatively related to the probability of rescheduling.

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

Which is NOT a key economic ratio in credit scoring models to estimate sovereign country risk exposure?

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

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

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

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters