1.Which of the following reasons most completely describes why country risk assessment is prone to error?
A.While data is accurate,it is often incomplete.
B.Different accounting standards are used in different countries.
C.Disclosure requirements are inconsistent across international borders.
D.The exchange rate correlations are unstable during economic downturns.
2.Which of the following bonds bears the greatest price impact if its yield declines by one percent?A bond with:
A.30-year maturity and selling at 100.
B.10-year maturity and selling at 100.
C.10-year maturity and selling at 70.
D.30-year maturity and selling at 70.
3.The characteristic function of the product of independent random variables is equal to the:
A.square root of the product of the individual characteristic functions.
B.exponential root of the product of the individual characteristic functions.
C.product of the individual characteristic functions.
D.sum of the individual characteristic functions.
In addition to contagion,there are other reasons why country risk assessment is prone to error.First of all,the interrelationship among the relevant variables is complex and hard to model.Also,many sovereign and foreign borrowers provide incomplete and/or inaccurate information.
There are three features that determine the magnitude of duration:
(1)The lower the coupon,the greater the bond price volatility.
(2)The longer the term to maturity,the greater the price volatility.
(3)The lower the initial yield,the greater the price volatility.
The bond with the 30-year maturity will have a greater price impact than the 10-year maturity.The bond selling at the greatest discount will have a large price impact,a discount means that the coupon payments are low or the initial yield is low.So,the bond with the 30-year maturity and selling at 70 will have the greatest price volatility.
The characteristic function of the sum of independent random variables is equal to the product of the individual characteristic functions.E(XY)=E(X)×E(Y).