Question 1

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 2

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. 
E) Debt conversion schemes of debtor countries that signal creditworthiness. 
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. 
E) Debt conversion schemes of debtor countries that signal creditworthiness.

Question 3

One problem with using CRA statistical credit scoring models to evaluate sovereign credit risk is the classification into only two possible outcomes.

Accepted Answer

A) True 
 B)False

Question 4

From the perspective of the lending FI, the risk of a well-diversified portfolio of loans should be less than weighted average risk of the individual loans.

Accepted Answer

A) True 
 B)False

Question 5

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 the country 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. 
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 6

Under the doctrine of sovereign immunity, creditors cannot force repayment of the debt.

Accepted Answer

A) True 
 B)False

Question 7

Rescheduling may cause the borrower to lose future borrowing opportunities for investment projects.

Accepted Answer

A) True 
 B)False

Question 8

What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 75 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 9

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 10

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 11

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. 
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.

Question 12

In the LCD and EM debt markets, sovereign bonds must be collateralized by domestically-issued government bonds.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following variables can have a negative impact on the probability of rescheduling 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 14

The relationship of this variable with the probability of rescheduling is often disputed.

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 15

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 16

The Institutional Investor Index is based on

Accepted Answer

A) spread of the required interest rate on a country's debt over LIBOR. 
B) a number of economic and political factors weighted according to their relative importance in determining country risk problems. 
C) surveys of the loan officers of major multinational banks. 
D) combined economic and political risk on a 10-point (maximum) scale. 
E) key economic ratios for each regional grouping. 
A) spread of the required interest rate on a country's debt over LIBOR. 
B) a number of economic and political factors weighted according to their relative importance in determining country risk problems. 
C) surveys of the loan officers of major multinational banks. 
D) combined economic and political risk on a 10-point (maximum) scale. 
E) key economic ratios for each regional grouping.

Question 17

Which of the following describes debt moratoria?

Accepted Answer

A) Delay in repaying interest and/or principal on debt because of government prohibition of such action. 
B) Special reserves created on the balance sheet against which to write off bad loans. 
C) The official terminology for a sovereign loan rescheduling. 
D) Debt issued by a country that is swapped for an outstanding loan to that same country. 
E) Changing the contractual terms of a loan, such as its maturity and interest payments. 
A) Delay in repaying interest and/or principal on debt because of government prohibition of such action. 
B) Special reserves created on the balance sheet against which to write off bad loans. 
C) The official terminology for a sovereign loan rescheduling. 
D) Debt issued by a country that is swapped for an outstanding loan to that same country. 
E) Changing the contractual terms of a loan, such as its maturity and interest payments.

Question 18

CRA statistical credit scoring models have difficulty measuring political risk events.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following are normally traded at very deep discounts from 100 percent?

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 20

Sometimes banks received criticism because domestic governments take special political steps to reduce the probability that foreign borrowers will default or repudiate their debt contracts, an occurrence that could cause financial harm to the domestic banks.

Accepted Answer

A) True 
 B)False

Exam 14: Sovereign Risk

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

Which of the following describes debt repudiation?

One problem with using CRA statistical credit scoring models to evaluate sovereign credit risk is the classification into only two possible outcomes.

From the perspective of the lending FI, the risk of a well-diversified portfolio of loans should be less than weighted average risk of the individual loans.

Under the doctrine of sovereign immunity, creditors cannot force repayment of the debt.

Rescheduling may cause the borrower to lose future borrowing opportunities for investment projects.

What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 75 cents on the dollar? (choose the closest answer)

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

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.

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

In the LCD and EM debt markets, sovereign bonds must be collateralized by domestically-issued government bonds.

Which of the following variables can have a negative impact on the probability of rescheduling in the credit scoring model to estimate sovereign country risk exposure?

The relationship of this variable with the probability of rescheduling is often disputed.

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.

The Institutional Investor Index is based on

Which of the following describes debt moratoria?

CRA statistical credit scoring models have difficulty measuring political risk events.

Which of the following are normally traded at very deep discounts from 100 percent?

Sometimes banks received criticism because domestic governments take special political steps to reduce the probability that foreign borrowers will default or repudiate their debt contracts, an occurrence that could cause financial harm to the domestic banks.

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