The Following Is an Example of a Credit Scoring Model

question 40

Multiple Choice

The following is an example of a credit scoring model to estimate the probability of debt rescheduling for country I: P_i = 0.25 DSR_i + 0.17IR_i - 0.03 INVR_i + 0.84 VAREX_i + 0.93 MG_i
Where P_iis the probability of rescheduling country I's debt; DSR is the country's debt service ratio; IR is the country's import ratio; INVR is the country's investment ratio; VAREX is the country's variance of export revenue; and MG is the country's rate of growth of the domestic money supply.
Two countries are identical in all respects except that country A's debt service ratio is 1.5, while country B's debt service ratio is 1.25, and country A's import ratio is 0.75, while country B's import ratio is 0.90. Based only on the effect of these two variables, compare the likely price of debt issued by country A to the likely price of debt issued by country B if both debt issues have the same maturity and coupon payments. Both debt issues are trading in the secondary market.

• A) Country B's debt is priced higher because the probability of rescheduling is lower for country B than for country A.
• B) Country A's debt is priced higher because the probability of rescheduling is lower for country A than for country B.
• C) Country B's debt is priced lower because country B has a lower probability of rescheduling than does country A.
• D) Country A's debt is priced lower because country A has a lower probability of rescheduling than does country B.
• E) Both debt issues have the same price.

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Definitions:

Mantle

The thick layer of rock between the Earth's crust and core, playing a key role in tectonic movement and heat transfer.

Core

The innermost layer of the Earth, composed of an iron-nickel alloy and divided into a solid inner core and a liquid outer core.

Lithosphere

The rigid outer layer of the Earth, consisting of the crust and the upper mantle.

Asthenosphere

The viscous, semi-fluid layer of the Earth's mantle located below the lithosphere, involved in plate tectonic movements and convection currents.