Learning Objectives: Discuss measures of sovereign default risk and describe components of a sovereign rating. Describe the shortcomings of the sovereign rating systems of rating agencies. Compare the use of credit ratings, market-based credit default spreads, and CDS spreads in predicting default.
Questions:
24.10.1. Based on the below information which country likely has the highest sovereign credit rating?
a. Ibit
b. Chi-Asia
c. SingKong
d. New Caldonia
24.10.2. John, a US-based analyst, is conducting research on Ibit to assign the country a sovereign rating. Ibit is a small country where all debt is issued by the federal government; hence, there is no sub-sovereign debt. John reviews the financials provided by Ibit’s finance department. Although John's agency has limited involvement with Ibit, it does include equities located in Ibit in a few of its passive ETFs. Which of the below criticisms of ratings agencies would be MOST justified in this situation?
a. Home Bias Effect
b. Information Problems
c. Revenue Bias
d. Incentive Problems
24.10.3. Chicago Firefighters Pension (CFP) owns Belize government bonds. The bonds have a $10,000,000 par value, and a credit default swap is available from Old Crow Bank for 300 basis points (3% of par value) for 10 years. In year 8, Belize bonds decrease to $8,000,000 value because of a decrease in demand for the bonds. What will be the total payment in year 8?
a. CFP will receive a net payment of $1.7M.
b. CFP will receive a net payment of $2M.
c. CFP will pay $300,000.
d. CFP will receive a total payment of $2M.
Answers here:
Questions:
24.10.1. Based on the below information which country likely has the highest sovereign credit rating?
a. Ibit
b. Chi-Asia
c. SingKong
d. New Caldonia
24.10.2. John, a US-based analyst, is conducting research on Ibit to assign the country a sovereign rating. Ibit is a small country where all debt is issued by the federal government; hence, there is no sub-sovereign debt. John reviews the financials provided by Ibit’s finance department. Although John's agency has limited involvement with Ibit, it does include equities located in Ibit in a few of its passive ETFs. Which of the below criticisms of ratings agencies would be MOST justified in this situation?
a. Home Bias Effect
b. Information Problems
c. Revenue Bias
d. Incentive Problems
24.10.3. Chicago Firefighters Pension (CFP) owns Belize government bonds. The bonds have a $10,000,000 par value, and a credit default swap is available from Old Crow Bank for 300 basis points (3% of par value) for 10 years. In year 8, Belize bonds decrease to $8,000,000 value because of a decrease in demand for the bonds. What will be the total payment in year 8?
a. CFP will receive a net payment of $1.7M.
b. CFP will receive a net payment of $2M.
c. CFP will pay $300,000.
d. CFP will receive a total payment of $2M.
Answers here:
