LOS k: Discuss the advantages and risks of investing in emerging market debt.

Q1. When compared to the debt issued by corporations in developed nations, the sovereign debt of emerging market governments tend to have a:

A)   lower level of standardized covenants but a more enforceable seniority structure.

B)   higher level of standardized covenants but a less enforceable seniority structure.

C)   lower level of standardized covenants and a less enforceable seniority structure.

Q2. Jill Upton, CFA, and Al Grey, CFA, are planning to add foreign bonds to the domestic portfolio, which they manage. They are discussing the advantage of adding bonds issued by sovereign emerging market governments. Compared to bonds issued by corporations, all of the following are advantages of sovereign emerging market government debt with EXCEPT:

A)   the bonds are free of default risk.

B)   the issuers tend to have reserves to absorb shocks.

C)   the issuers can react more decisively to negative economic events.

Q3. In the emerging market debt market, it is generally true that volatility is:

A)   low, and the returns have significant positive skewness.

B)   high, and the returns have significant negative skewness.

C)   high, and the returns have significant positive skewness.

LOS k: Discuss the advantages and risks of investing in emerging market debt. fficeffice" />

Q1. When compared to the debt issued by corporations in developed nations, the sovereign debt of emerging market governments tend to have a:

A)   lower level of standardized covenants but a more enforceable seniority structure.

B)   higher level of standardized covenants but a less enforceable seniority structure.

C)   lower level of standardized covenants and a less enforceable seniority structure.

Correct answer is C)

Sovereign debt typically lacks an enforceable seniority structure, in contrast to private debt, and little standardization of covenants exists among the various emerging market issuers.

Q2. Jill Upton, CFA, and Al Grey, CFA, are planning to add foreign bonds to the domestic portfolio, which they manage. They are discussing the advantage of adding bonds issued by sovereign emerging market governments. Compared to bonds issued by corporations, all of the following are advantages of sovereign emerging market government debt with EXCEPT:

A)   the bonds are free of default risk.

B)   the issuers tend to have reserves to absorb shocks.

C)   the issuers can react more decisively to negative economic events.

Correct answer is A)

The other advantages listed are true along with lower default risk, but the bonds are not free of default risk. Governments have and will default on bonds.

Q3. In the emerging market debt market, it is generally true that volatility is:

A)   low, and the returns have significant positive skewness.

B)   high, and the returns have significant negative skewness.

C)   high, and the returns have significant positive skewness.

Correct answer is B)         

Volatility in the emerging market debt market is high, and the returns are also frequently characterized by significant negative skewness.

Thx!