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Question
Two countries are identical in all respects except that country A's rate of growth of the domestic money supply (MG) is 33 percent, while country B's MG is 25 percent, and country A's variance of export revenue (VAREX) is 3.75 percent, while country B's VAREX is 10 percent. Based only on these two variables, compare the prices of debt issued by country A to the price of debt issued by country B if both 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 A than for B.
B. Country A's debt is priced higher because the probability of rescheduling is lower for country A than does 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 higher probability of rescheduling than does country B.
E. Both debt issues have the same price.
Answer
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