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Basic Question 2 of 2
Which statement is true?
II. A government bond denominated in US$ and issued by the Japanese central government is virtually risk-free for a U.S. investor.
I. A foreign government can always raise taxes and control its domestic financial system to meet its foreign currency debt obligations.
II. A government bond denominated in US$ and issued by the Japanese central government is virtually risk-free for a U.S. investor.
User Contributed Comments 9
| User | Comment |
|---|---|
| parent | The Japanese government may default on the issue. |
| o123 | II. default risk + Xchange rate Risk |
| danrow | Sometimes governments set fiscal policies to meet their foreign obligations. For instance, they might rise taxes, or improve collection of taxes in order to prepay debt and reduce the amount paid in interests to world organizations (such as the world bank). Best example Uruguay, Brazil and Argentina in 2006-7 |
| CFALucille | I see why, its because the Japanese can't print US dollars |
| hoyleng | why is I incorrect??? pls explain. thanks |
| dipu617 | It the foreign govt in "I" refers to US govt then its true. ;-) |
| fabsan | The only reason I can think of why I is false is that: the Japanese gov has to make his payment in USD there they have to sell on the forex market Yen to buy USD. By using fiscal or monetary policy to raise fund to meet their payment, will bring the Yen down and therefore, they will need more and Yen to exchange and meet their payment in USD. They cannot play fiscal and monetary policies indefinitely (think about Greece, without the Euro) |
| kseeba17 | Why wouldn't you just assume that the country would use its currency to purchase said foreign currency on the markets. It just seems like a semantic nonsense question made with the sole purpose of trying to fool you |
| gomez1234 | HAHA, Turkey is applying exactly "I" currently so I thought it to be correct. |
I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz
Learning Outcome Statements
explain special considerations when evaluating the credit of sovereign and non-sovereign government debt issuers and issues
CFA® 2024 Level I Curriculum, Volume 4, Module 15.