Mechanic

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 public debt burden and debt service track record.

B) The country's balance of payments.

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

---

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.

Mechanic

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) living standards.

C) external security risks.

---

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

Mechanic

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) living standards.

C) external security risks.

---

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

Mechanic

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) Little control over either currencies.

C) Much control over one currency only.

---

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.

Mechanic

An analysis of the credit quality of the collateral is most important in assessing the creditworthiness of:

A) a sovereign bond issue.

B) an asset-backed securities issue.

C) a corporate bond issue.

---

Analyzing the credit quality of the collateral is important in the issuance of asset-back securities.

Mechanic

Which of the following is least likely a factor used in assessing the credit quality of a national government's local currency debt?

A) Income and economic structure.

B) Monetary policy and inflation pressures.

C) Balance of payments and structure of the external balance sheet.

---

In assessing the credit quality of local currency debt, only domestic government policies that emphasize fostering or impeding timely debt service are considered. Only for foreign currency debt will credit analysis focus on the interaction of domestic and foreign government policies as measured by a country's balance of payments and the structure of its external balance sheet.

Mechanic

A very similar analysis is required for which two types of debt?

A) Corporate bonds and asset-backed securities.

B) Municipal bonds and sovereign debt.

C) Sovereign debt and corporate bonds.

---

The analysis of sovereign debt is actually very similar to that of corporate debt. Both are concerned with character, capacity, and capital as well as availability and the quality of financial reporting. Municipal bond analysis requires specialized analysis of rate covenants and priority-of-revenue claims.

Mechanic

An evaluation of the quality of the servicer is a key consideration for which type of credit?

A) Municipal bonds.

B) Corporate bonds.

C) Asset-backed securities.

---

The quality of the seller/servicer is critical for the assessment of asset-backed securities.

Mechanic

The assessment of which of the following types of debt require that the analyst use only qualitative factors, only quantitative factors or both qualitative and quantitative factors?

A) Corporate bonds - both; sovereign debt - both; municipal debt - quantitative.

B) Corporate bonds - both; sovereign debt - qualitative; municipal debt - quantitative.

C) Corporate bonds - both; sovereign debt - both; municipal debt - both.

---

Corporate, sovereign, and municipal debt all require quantitative and qualitative elements of analysis.