CFA Practice Question

There are 266 practice questions for this study session.

CFA Practice Question

Which of the following statement is (are) true with respect to sovereign ratings assigned by S&P?

I. Foreign currency debt ratings are usually higher than local currency ratings for the same sovereign issuer.
II. Assigning a debt rating for a sovereign issue is more subjective than assigning a debt rating for a corporate bond.
III. If the sovereign issuer is a member of the World Trade Organization, legal action may be taken against it if it violates its bond obligations.
IV. A low debt service-to-import ratio gives an indication that a sovereign nation has enough foreign currencies to meet its foreign debt obligations.
Correct Answer: II

I is incorrect because governments generally have a much harder task paying foreign currency debts than local currency debts. For that matter, foreign currency debt ratings are usually lower than local currency debt ratings for the same sovereign issuer.

III is incorrect because neither the WTO nor the World Court has jurisdictions for such matters. The reality is that if a sovereign nation is no longer willing to pay its bond obligations, there is nothing that the investor can do.

IV is incorrect. Instead, it's a low debt service-to-export ratio which gives an indication that a sovereign nation has enough foreign currencies to meet its foreign debt obligations. Imports do not bring in foreign currencies; in fact, imports cause foreign currencies to leave a nation.

User Contributed Comments 1

User Comment
ericczhang Theoretically, imports can reflect the ability of a nation to command foreign currency to pay down foreign currency debts. This may be more useful for nations that are better at generating financial account surpluses/inflows than current account surpluses/inflows like the US and the UK.
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