LOS i: Discuss the key considerations used by Standard & Poor’s in assigning sovereign ratings and describe why two ratings are assigned to each national government.

Q1. Does a national government have much or little control over its ability to generate enough currency to meet its local currency and foreign currency obligations?

A)   Much control over both currencies.

B)   Much control over one currency only.

C)   Little control over either currencies.

Q2. Which of the following factors least likely represents an economic risk that Standard and Poor's Corporation would consider in the rating of a sovereign debt credit?

A)   natural resource endowments.

B)   external security risks.

C)   living standards.

Q3. Which of the following is NOT a factor used by Standard & Poor’s rating agency to assess the creditworthiness of a government’s local currency debt?

A)   The country's balance of payments.

B)   The public debt burden and debt service track record.

C)   Degree of participation by the populace in the political process.

Q4. Which of the following is NOT a category used by Standard & Poor’s to derive their ratings on sovereign bond issues?

A)   Economic growth prospects.

B)   Price stability.

C)   Capital market structure.

Q5. Political risk is best described as:

A)   an assessment of the ability of a national government to service its debt.

B)   an assessment of the willingness of a national government to satisfy its debt obligations.

C)   a quantitative evaluation of political factors that influence economic policies.

Q6. Which of the following is a component of political risk?

A)   The existence of either a market or non-market economy.

B)   Integration in global trade and financial system.

C)   Governmental operating and budget balances.

Q7. Each of the following factors is analyzed relative to a country's willingness to repay its sovereign debt EXCEPT:

A)   internal security risks.

B)   the degree of economic and industrial diversification.

C)   the participation of the population in the political process.

Q8. Which of the following is the primary concern of a rating agency when rating the foreign currency debt of a sovereign nation?

A)   The government debt burden and debt service experience.

B)   The country's balance of payments and its ability to generate the appropriate foreign currency cash flows.

C)   Political stability and the extent of the participation of the populace in the political process.

Q9. Which of the following statements regarding sovereign bond issues is least accurate?

A)   U.S. government debt is not rated by any nationally recognized rating agency.

B)   Defaults are greater on local currency issues than foreign currency issues.

C)   There is a local currency rating and a foreign currency rating assigned to each national government.

Q10. Which of the following is least likely a factor used by Standard & Poor’s rating agency to assess the creditworthiness of a government’s foreign currency debt?

A)   Net public debt.

B)   Country's balance of payments.

C)   Income and economic structure.

Q11. What is the key difference between a local currency debt rating and a foreign currency debt rating?

A)   Local currency debt ratings are uncorrelated with the country's foreign currency debt ratings.

B)   A foreign currency debt rating depends primarily upon the economic infrastructure of the economy and the level of education and living standards in the country.

C)   A foreign currency debt rating relies on the country's ability to generate appropriate foreign currency cash flows via its trade flows.

LOS i: Discuss the key considerations used by Standard & Poor’s in assigning sovereign ratings and describe why two ratings are assigned to each national government. fficeffice" />

Q1. Does a national government have much or little control over its ability to generate enough currency to meet its local currency and foreign currency obligations?

A)   Much control over both currencies.

B)   Much control over one currency only.

C)   Little control over either currencies.

Correct answer is B)

A national government has more control over its ability to raise funds for local currency debt if it is willing to raise taxes or print money. A government has much less control in its ability to raise funds for foreign currency debt since it must purchase the foreign currency and has little control of its exchange rate.

Q2. Which of the following factors least likely represents an economic risk that Standard and Poor's Corporation would consider in the rating of a sovereign debt credit?

A)   natural resource endowments.

B)   external security risks.

C)   living standards.

Correct answer is B)

External security risk is a political risk factor, not an economic risk factor.

Q3. Which of the following is NOT a factor used by Standard & Poor’s rating agency to assess the creditworthiness of a government’s local currency debt?

A)   The country's balance of payments.

B)   The public debt burden and debt service track record.

C)   Degree of participation by the populace in the political process.

Correct answer is A)

Standard & Poor examines any government policies that could foster or interfere with timely debt service. These factors include the stability of political institutions and degree of popular participation in the political process, income and economic structure, fiscal policy, monetary policy, inflation, public debt burden, and debt service record.

Q4. Which of the following is NOT a category used by Standard & Poor’s to derive their ratings on sovereign bond issues?

A)   Economic growth prospects.

B)   Price stability.

C)   Capital market structure.

Correct answer is C)       

The categories used to assess sovereign bond issues include: political risk, income and economic structure, economic growth prospects, fiscal flexibility, public debt burden, price stability, balance of payments flexibility, and external debt and liquidity.

Q5. Political risk is best described as:

A)   an assessment of the ability of a national government to service its debt.

B)   an assessment of the willingness of a national government to satisfy its debt obligations.

C)   a quantitative evaluation of political factors that influence economic policies.

Correct answer is B)

Political risk is a qualitative issue that addresses the willingness of a national government to pay its debt obligations.

Q6. Which of the following is a component of political risk?

A)   The existence of either a market or non-market economy.

B)   Integration in global trade and financial system.

C)   Governmental operating and budget balances.

Correct answer is B)

Political risk is the assessment of the form of government, extent of popular participation, orderliness of leadership succession, degree of consensus on economic policy objectives, integration in global trade and financial systems, and internal and external security risks.

Q7. Each of the following factors is analyzed relative to a country's willingness to repay its sovereign debt EXCEPT:

A)   internal security risks.

B)   the degree of economic and industrial diversification.

C)   the participation of the population in the political process.

Correct answer is B)

The degree of economic and industrial diversification deals with the ability, not willingness, of a country to repay its sovereign debt.

Q8. Which of the following is the primary concern of a rating agency when rating the foreign currency debt of a sovereign nation?

A)   The government debt burden and debt service experience.

B)   The country's balance of payments and its ability to generate the appropriate foreign currency cash flows.

C)   Political stability and the extent of the participation of the populace in the political process.

Correct answer is B)

The key to the evaluation of the foreign currency debt of the nation is the country's balance of payments and its ability to generate the appropriate foreign currency cash flows.

Q9. Which of the following statements regarding sovereign bond issues is least accurate?

A)   ffice:smarttags" />U.S. government debt is not rated by any nationally recognized rating agency.

B)   Defaults are greater on local currency issues than foreign currency issues.

C)   There is a local currency rating and a foreign currency rating assigned to each national government.

Correct answer is B)

Defaults are greater on foreign currency issues because a national government has little control with respect to its exchange rate and must purchase foreign currency to repay its foreign currency obligation.

Q10. Which of the following is least likely a factor used by Standard & Poor’s rating agency to assess the creditworthiness of a government’s foreign currency debt?

A)   Net public debt.

B)   Country's balance of payments.

C)   Income and economic structure.

Correct answer is C)

For foreign currency debt, Standard & Poor analyzes a country’s balance of payments, net public debt, total net external debt and net external liabilities.

Q11. What is the key difference between a local currency debt rating and a foreign currency debt rating?

A)   Local currency debt ratings are uncorrelated with the country's foreign currency debt ratings.

B)   A foreign currency debt rating depends primarily upon the economic infrastructure of the economy and the level of education and living standards in the country.

C)   A foreign currency debt rating relies on the country's ability to generate appropriate foreign currency cash flows via its trade flows.

Correct answer is C)

A foreign currency debt rating relies on the country's ability to generate appropriate foreign currency cash flows via its trade flows.

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