AIM 1: Describe the difference between credit risk and sovereign risk and define debt repudiation and debt rescheduling.

1、Simran is a small Caribbean country that depends on sugar as its primary export. The risk of the Simran government deciding that it will not pay its foreign currency loan is an example of:

A) political risk.

B) foreign exchange risk.

C) downgrade risk.

D) sovereign risk.

The correct answer is D

The risk of a sovereign government willingly confiscating assets, freezing assets, or not fulfilling its obligations is called sovereign risk. Political risk is the willingness and ability of a government to enforce its constitution and laws. Foreign exchange risk is the risk of fluctuations in foreign currency values. Downgrade risk is a component of credit risk that deals with a major credit rating agency giving a lower credit rating to a corporate debt issuer.

2、Which of the following would be considered a sovereign risk?

A) An international firm refuses to make any further debt repayments to outside creditors.

B) An international firm refuses to allow legal remedies to be offset in the international bankruptcy courts.

C) A foreign country assesses a domestic bank and refuses to allow a firm in their country to borrow from the domestic bank.

D) A foreign country refuses to allow any further debt repayment to be made to outside creditors.

The correct answer is D

Sovereign risk is the risk of a foreign government limiting or preventing domestic borrowers from repaying debt; it is independent of the credit quality of an individual borrower. An international bankruptcy court doesn’t exist.

3、Cross-default provisions:

A) allow a foreign country to obtain special default treatment from bond underwriters.

B) prevent a country from choosing a group of weak lenders for special default treatment.

C) state that a foreign firm cannot elect to default on an outstanding loan when the sovereign country has defaulted.

D) prevent a country from choosing to default to domestic lenders.

The correct answer is B

Cross-default provisions address loans and state that if a country were to default on just one of its loans, all other outstanding loans would automatically be in default as well. Cross-default clauses prevent a country from choosing a group of weak lenders for special default treatment.

4、Many international loan contracts contain cross-default provisions to prevent sovereigns from:

A) favoring only those lenders who reschedule debt payments.

B) canceling their own obligations while seeking to collect from others.

C) taking advantage of weak creditors. 

D) moving valuable assets to third countries, out of the reach of creditors. 

The correct answer is C

Cross-default provisions treat a default on one loan as a default on all. This keeps sovereigns from defaulting on obligations to weak creditors and forcing concessions from them.

5、When a sovereign lender defaults on its debt and can negotiate a complete cancellation, it is referred to as a:

A) multiyear restructuring agreement.

B) debt rescheduling.

C) debt amnesty.

D) debt repudiation.

The correct answer is D

Debt repudiation is an unequivocal cancellation of all current and future foreign debt and equity obligations of a borrower.

AIM 4: Describe the different mechanisms for dealing with sovereign risk exposure.

1、A multiyear restructuring agreement (MYRA) for a $100 million loan with a sovereign has the following features: maturity extended from two to five years; principal amortization for four years at 25 percent per year; grace period of one year; up-front fee of 1.25 percent; loan rate of 6 percent; and bank discount rate of 6.75 percent. If the original loan had a value equal to its par, the concessionality attached to this MYRA is closest to:

A) $52,570,000.

B) $98,924,000.

C) $997,000.

D) $47,430,000.

The correct answer is C

The MYRA loan has a value of:

 [attach]13917[/attach]

The concessionality is then the difference between the original loan and the MYRA loan value = 100 – 99.003 = $0.997 million = $997,000.

[此贴子已经被作者于2009-6-27 15:04:48编辑过]

2、Which variable is NOT included in sovereign risk probability models?

A) Investment ratio.

B) Debt service ratio.

C) Variance of import revenue.

D) Domestic money supply growth.

The correct answer is C

Variance of export (not import) revenue is used in sovereign risk probability models.

AIM 3: Describe the six major problems of using traditional country risk analysis models and techniques.

Which of the following is NOT a problem with traditional country risk analysis (CRA) models?

      I. Using population groups that are too narrow.

     II. Economic data sets are often out of date or inaccurate.

    III. Model measures “stand-alone” country risk.

    IV. Model includes inaccurate political risk measures.

A) II and III.

B) I and IV.

C) I and III.

D) II and IV.

The correct answer is B

Traditional CRA models use population groups that are too broad and include no political risk measures. II and III are problems with the model.

AIM 3: Describe the six major problems of using traditional country risk analysis models and techniques.

Which of the following is NOT a benefit of rescheduling sovereign debt to the borrower? Rescheduling debt:

      I. increases the present value (PV) of a borrower's future payments.

     II. increases a borrower's consumption of foreign imports.

    III. increases the rate of a borrower's domestic investment compared to default.

    IV. decreases the PV of a borrower's future payments.

A) I and III.

B) I only.

C) II and IV.

D) III only.

The correct answer is B

Borrowers’ benefits from rescheduling debt:

Lowers the present value (PV) of its future hard currency payments, and thereby increases the consumption of foreign imports.

Increases the rate of its domestic investment compared to default.

AIM 2: Describe the five key economic variables in measuring the probability of rescheduling sovereign risk.

Country F has a debt service ratio (DSR) of 4. Its exports total $17 billion, and its principal repayments are $3 billion. The value of its interest payments is closest to:

A) $65.0 billion. 

B) $2.3 billion.

C) $4.0 billion. 

D) $11.0 billion.

The correct answer is A

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