Sovereign Bonds,unlike Corporate Bonds,are Insulated from Default Risk Because the Issuer

question 86

Multiple Choice

Sovereign bonds,unlike corporate bonds,are insulated from default risk because the issuer has the ultimate ability to print money to meet debt servicing obligations. A major reason that investors do in fact associate risk with the bonds of certain countries is that

• A) were it necessary to print money to meet their debt obligations, this would likely increase inflation and thereby result in a decline in the real rate of return when the debt matures.
• B) there is uncertainty because governments often face re-election during the period prior to the maturity of their sovereign bonds.
• C) sovereign bonds are usually less liquid than corporate bonds denominated in the same currency.
• D) corporate bonds are backed by tangible physical assets which is not the case with sovereign bonds.

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Definitions:

Type II Error

An incorrect decision to accept the null hypothesis when it is false.

Punishment

A consequence delivered after an undesirable behavior, intended to reduce the likelihood of that behavior occurring again.

Inferential Statistics

This is a branch of statistics that makes predictions or inferences about a population based on a sample of data taken from that population.

Null Hypothesis

A default hypothesis that there is no effect or no difference, and any observed difference is due to sampling or experimental error.