CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers
An analyst compares a bond issued by a regional development bank owned by many sovereign members with a bond issued by a single sub-national state government. The supranational bond is most likely to have lower credit risk because:
Supranational bonds typically have lower credit risk because member countries support the institution through paid-in and callable capital, and it often enjoys preferred creditor status on loans. Sub-national states usually can tax, and supranationals can still face currency exposure, so the other reasons fail.
- Asupranationals face no currency exposure on their loans
- Bmember countries provide callable capital and the institution often lends to preferred-creditor borrowersCorrect
- Csub-national governments cannot levy taxes to service debt
Explanation
Supranationals often have high ratings because of strong member support such as callable capital and preferred creditor status on their loans. Sub-national governments commonly can levy taxes, and supranationals can face currency exposure, so the other statements are incorrect.
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