1. If the credit risk of a foreign borrower is good, then the sovereign country risk is irrelevant.
2. FIs that lend to foreign entities often need to make provisions to their loan loss reserves.
3. Sovereign country risk exposure is a result of the FI‘s inability to be fully diversified.
4. Sovereign country risk is largely independent of the credit standing of the foreign borrower.
5. A lending decision to a firm in a foreign country should involve both a credit risk analysis and a sovereign
risk analysis.
6. All of the following are relevant determinants of sovereign risk exposure: the rate of domestic money supply
growth; the variance of export revenue, and the size of the population.
7. Lenders often are willing to reschedule debt payments to avoid forcing the borrower into outright
bankruptcy.
8. Sovereign risk involves restrictions placed on borrowers and investors regarding the movement of funds into
and out of a foreign country.
9. 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.
10. Prior to World War II, most international debt was in the form of bank loans.
11. Rescheduling loans is easier than renegotiating bonds because the same FIs typically form loan syndicates
that create cohesiveness in negotiations.
12. 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.
13. The Economist Intelligence Unit is a rating of sovereign risk based on economic and political risk within a
country.
14. The debt service ratio of a country should be negatively related to the probability of rescheduling.
15. The larger is the import ratio of a country; the higher is the probability that the country will have to schedule
its debt payments.
16. In international finance, the investment ratio measures the amount of real investment relative to the gross
national product of the country.
17. In the statistical modeling of the country risk analysis, the investment ratio is considered to have a negative
impact on the probability of rescheduling because the larger expenditures on investment infrastructure leaves
less funds for debt payment.
18. In international finance, the variance of export revenue is based solely on the quantity of product available
for export.
19. Export revenue may be highly variable due to the quantity of exports and the prices that may be realized on
the exported products.
20. The export revenue variance VAREX should be negatively related to the probability of debt rescheduling.
21. A positive relationship is considered to exist between domestic money supply growth and the probability of
rescheduling debt.
22. Traditional country risk analysis based on discriminant statistical models often suffers from problems of
using data that is no longer current.
23. CRA statistical credit scoring models have difficulty measuring political risk events.
24. One problem with using CRA statistical credit scoring models to evaluate sovereign credit risk is the
classification into only two possible outcomes.
25. CRA statistical credit scoring models are very adept at capturing political risk events such as strikes,
elections, corruption, etc.
26. 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.
27. The export revenue variance (VAREX) ratio tends to have high systematic risk elements in a CRA analysis.
28. Money supply growth and the import ratio tend to have low systematic risk elements in a CRA analysis.
29. For any given country risk variable, the greater the size of the systematic risk relative to the unsystematic
risk, the less important the variable.
30. The debt service ratio and the import ratio typically have high systematic risk elements in a CRA analysis.
31. By rescheduling its debt, a borrower raises the present value of its future payments in hard currencies.
32. Rescheduling may cause the borrower to lose future borrowing opportunities for investment projects.
33. In exchange for the loss of some present value of the interest and principal on a loan after a rescheduling,
the lender avoids the permanent loss that would result from a default.
34. A cost of rescheduling for a lender is the potential placement of the lender on a regulatory watch or problem
list.
35. Trading activity and investor confidence in foreign debt increased in the early 2000s.
36. Buyers of LDC debt in secondary markets typically are large FIs who are willing to accept write-downs of
loans on their balance sheets.
37. Sellers of LDC debt in secondary markets include small FIs wishing to disengage themselves from the LDC
market.
38. Both buyers and sellers of LDC debt seem willing to participate in the LDC debt markets for the purpose of
rebalancing the country risk exposure on their balance sheets.
39. The advantage to the lender of a Brady bond versus a loan to a foreign country is the much longer maturity
and thus the lower payment schedule of a Brady bond.
40. The advantage to the borrowing country of a Brady bond versus a loan from an FI is the much longer
maturity and thus the lower payment schedule of a Brady bond.
41. The advantage to the lender of a Brady bond versus a loan to a foreign country is that U.S. Treasury bonds
serve as collateral for Brady bonds.
42. One advantage of swapping a sovereign loan for a bond is the capability to sell the bond in the secondary
market.
43. The difference between a sovereign bond and a Brady bond is that the sovereign bond lacks U.S. Treasury
bonds as collateral.
44. Some LDCs have begun to sell sovereign bonds for the purpose of repurchasing their own Brady bonds
because they benefit from not having to pledge U.S. Treasury bonds as collateral.
45. Repurchasing Brady bonds with the proceeds from the sale of sovereign bonds usually allows countries to
save because of the lower interest spreads on the sovereign bonds.
46. Performing loans in the LDC debt market are loans on which the foreign country is making promised
payments.
47. Which of the following describes debt moratoria?
48. Which of the following describes debt repudiation?
49. Which of the following describes debt rescheduling?
50. Making a lending decision to a party residing in a foreign country is a two-step decision. What are the two
steps involved in such a decision?
51. Which of the following is an example of an exogenous risk?
52. Which of the following observations concerning loan default provisions is NOT true?
53. The Euromoney Index for a given country currently is based on the
54. The Institutional Investor Index is based on
55. Which is NOT a key economic ratio in credit scoring models to estimate sovereign country risk exposure?
56. In international finance, the debt service ratio is found by dividing interest and amortization payments by
the
57. In international finance, the import ratio is determined by dividing the value of imports by the
58. In international finance, the investment ratio is determined by dividing the value of real investment by the
59. 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?
60. The relationship of this variable with the probability of rescheduling is often disputed.
61. Commodity price and quantity risk is measured by which of the following variables in the credit scoring
model to estimate sovereign country risk exposure?
62. Lenders may find it beneficial to reschedule sovereign country debt
63. Lenders may find it costly to reschedule non-accruing sovereign country debt because
64. Buyers are willing to purchase rescheduled LDC (less developed country) debt because of