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Question
Two countries are identical in all respects except that country A's debt service ratio is 1.5, while country B's debt service ratio is 1.25, and country A's import ratio is 0.75, while country B's import ratio is 0.90. Based only on the effect of these two variables, compare the likely price of debt issued by country A to the likely price of debt issued by country B if both debt issues have the same maturity and coupon payments. Both debt issues are trading in the secondary market.
A. Country B's debt is priced higher because the probability of rescheduling is lower for country B than for country A.
B. Country A's debt is priced higher because the probability of rescheduling is lower for country A than for country B.
C. Country B's debt is priced lower because country B has a lower probability of rescheduling than does country A.
D. Country A's debt is priced lower because country A has a lower probability of rescheduling than does country B.
E. Both debt issues have the same price.
Answer
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