CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which statement is true?

I. A foreign government can always raise taxes and control its domestic financial system to meet its foreign currency debt obligations.
II. A government bond denominated in US$ and issued by the Japanese central government is virtually risk-free for a U.S. investor.
Correct Answer: None

A foreign government can raise taxes and control its domestic financial system to meet its domestic - not foreign - currency debt obligations.

User Contributed Comments 9

User Comment
parent The Japanese government may default on the issue.
o123 II. default risk + Xchange rate Risk
danrow Sometimes governments set fiscal policies to meet their foreign obligations. For instance, they might rise taxes, or improve collection of taxes in order to prepay debt and reduce the amount paid in interests to world organizations (such as the world bank). Best example Uruguay, Brazil and Argentina in 2006-7
CFALucille I see why, its because the Japanese can't print US dollars
hoyleng why is I incorrect??? pls explain. thanks
dipu617 It the foreign govt in "I" refers to US govt then its true. ;-)
fabsan The only reason I can think of why I is false is that: the Japanese gov has to make his payment in USD there they have to sell on the forex market Yen to buy USD. By using fiscal or monetary policy to raise fund to meet their payment, will bring the Yen down and therefore, they will need more and Yen to exchange and meet their payment in USD. They cannot play fiscal and monetary policies indefinitely (think about Greece, without the Euro)
kseeba17 Why wouldn't you just assume that the country would use its currency to purchase said foreign currency on the markets. It just seems like a semantic nonsense question made with the sole purpose of trying to fool you
gomez1234 HAHA, Turkey is applying exactly "I" currently so I thought it to be correct.
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