Skip to content

CFA Level I · CFA Level I Exam · Credit Analysis for Government Issuers

A sovereign's government debt is 90% of GDP, and nominal GDP is expected to grow 4% a year. If the government runs a primary balance of zero and pays an average interest rate of 5% on its debt, the debt-to-GDP ratio next year is closest to:

The ratio is closest to 90.9%. Debt rises from 90 to 94.5 because of 5% interest with no primary surplus, while GDP rises from 100 to 104. Dividing 94.5 by 104 gives about 90.9%, so the ratio drifts upward when interest exceeds growth.

  1. A90.0%
  2. B90.9%Correct
  3. C93.6%

Explanation

With zero primary balance, debt grows by interest: 90 × 1.05 = 94.5 of the original GDP of 100. GDP becomes 104. Ratio = 94.5/104 = 90.87%, about 90.9%. The 93.6% figure ignores GDP growth in the wrong way (90×1.04), and 90.0% assumes stable ratio.

Did you get it right without looking?

One question tells you little. A timed set on Credit Analysis for Government Issuers shows your real accuracy, how long you take and where you lose marks.

Practise Credit Analysis for Government IssuersFree diagnostic mock

More Credit Analysis for Government Issuers questions