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

In sovereign credit analysis, a government that has issued bonds under local law in its own currency is most likely to find that, compared with foreign-currency debt, its local-currency debt:

Local-currency sovereign debt is less likely to default than foreign-currency debt. The government can raise taxes, borrow domestically or have its central bank supply local currency, whereas repaying foreign-currency debt requires obtaining foreign exchange, which it cannot create.

  1. Ais less likely to default because the government can generate local currencyCorrect
  2. Bis more likely to default because local law limits creditor rights
  3. Chas the same default probability because currency of issue is irrelevant

Explanation

A sovereign can tax, borrow domestically and, via its central bank, create local currency, so local-currency debt is generally viewed as lower default risk than foreign-currency debt, which requires acquiring foreign exchange. Currency of issue is therefore relevant to default probability, so the other two options are wrong.

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