Question 1

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

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

A lending decision to a firm in a foreign country should involve both a credit risk analysis and a sovereign risk analysis.

Accepted Answer

A) True 
 B)False

Question 5

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. 
E) bankruptcy costs are high. 
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. 
E) bankruptcy costs are high.

Question 6

Money supply growth and the import ratio tend to have low systematic risk elements in a CRA analysis.

Accepted Answer

A) True 
 B)False

Question 7

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. 
E) They both have the same sovereign 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. 
E) They both have the same sovereign country risk exposure.

Question 8

Assume that the thrift variable-rate liabilities are CDs indexed to some domestic rate. Which of the following statements describes the hedge characteristics of the above example?

Accepted Answer

A)  The thrift is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates. 
B)  Only the bank is fully hedged. 
C)  The thrift is exposed to basis risk if the credit/default risk premium on the thrift's CDs increases over time. 
D)  All of the above. 
E)  Answers A and C only. 
A)  The thrift is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates. 
B)  Only the bank is fully hedged. 
C)  The thrift is exposed to basis risk if the credit/default risk premium on the thrift's CDs increases over time. 
D)  All of the above. 
E)  Answers A and C only.

Question 9

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

Accepted Answer

A) Governments appear to view the social costs of default on bonds as less critical than on loans. 
B) Many international loan contracts contain cross-default provisions that automatically put into default all loans by that country in the case of one default. 
C) Banks receive no subsidization from major governments to make international loans. 
D) Many international loan syndicates contain the same group of banks which increases the cohesiveness of loan renegotiations. 
E) Renegotiation of loans is easier because there are fewer banks in loan syndication than there are bondholders in a debt offering. 
A) Governments appear to view the social costs of default on bonds as less critical than on loans. 
B) Many international loan contracts contain cross-default provisions that automatically put into default all loans by that country in the case of one default. 
C) Banks receive no subsidization from major governments to make international loans. 
D) Many international loan syndicates contain the same group of banks which increases the cohesiveness of loan renegotiations. 
E) Renegotiation of loans is easier because there are fewer banks in loan syndication than there are bondholders in a debt offering.

Question 10

The Economist Intelligence Unit is a rating of sovereign risk based on economic and political risk within a country.

Accepted Answer

A) True 
 B)False

Question 11

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 12

In international finance, the variance of export revenue is based solely on the quantity of product available for export.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

Rescheduling loans is easier than renegotiating payments on bonds because the same FIs typically form loan syndicates that create cohesiveness in negotiations.

Accepted Answer

A) True 
 B)False

Question 16

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. 
E) should not change over time. 
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. 
E) should not change over time.

Question 17

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. 
E) Assessing the foreign exchange risk involved and the security that can be provided by the borrower. 
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. 
E) Assessing the foreign exchange risk involved and the security that can be provided by the borrower.

Question 18

In international finance, the import ratio is determined by dividing the value of imports 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 19

Which of the following makes international loan rescheduling more likely than bond rescheduling?

Accepted Answer

A) International loan contracts are not allowed to contain cross-default provisions. 
B) Typically there are more FIs in an international lending syndicate compared to the number of potential bondholders. 
C) Since World War II more international debt has been in the form of bonds. 
D) An international loan syndicate typically comprises the same FIs which allows greater cohesiveness for negotiations. 
E) All of the above. 
A) International loan contracts are not allowed to contain cross-default provisions. 
B) Typically there are more FIs in an international lending syndicate compared to the number of potential bondholders. 
C) Since World War II more international debt has been in the form of bonds. 
D) An international loan syndicate typically comprises the same FIs which allows greater cohesiveness for negotiations. 
E) All of the above.

Question 20

Both the debt service ratio and the import ratio typically have low systematic risk elements in a CRA analysis.

Accepted Answer

A) True 
 B)False

Exam 14: Sovereign Risk

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

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.

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

A lending decision to a firm in a foreign country should involve both a credit risk analysis and a sovereign risk analysis.

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

Money supply growth and the import ratio tend to have low systematic risk elements in a CRA analysis.

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?

Assume that the thrift variable-rate liabilities are CDs indexed to some domestic rate. Which of the following statements describes the hedge characteristics of the above example?

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

The Economist Intelligence Unit is a rating of sovereign risk based on economic and political risk within a country.

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 variance of export revenue is based solely on the quantity of product available for export.

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

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

Rescheduling loans is easier than renegotiating payments on bonds because the same FIs typically form loan syndicates that create cohesiveness in negotiations.

The statistical results of the country risk analysis models

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?

In international finance, the import ratio is determined by dividing the value of imports by the

Which of the following makes international loan rescheduling more likely than bond rescheduling?

Both the debt service ratio and the import ratio typically have low systematic risk elements in a CRA analysis.

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