Financial Risk Manager Part 1

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An analyst at an asset management company is evaluating the credit risk of sovereign bonds issued by several countries. The analyst examines the use of credit ratings provided by rating agencies and credit spreads to assess sovereign credit risk, and considers the use of sovereign CDS to hedge this risk. Which of the following would the analyst find to be correct?

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The bonds issued by two countries that have the same credit rating are highly likely to have the same credit spread.

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Sovereign credit ratings and corporate credit ratings adjust more quickly to new information about the borrower's creditworthiness than credit spreads do.

Both the market for a country's bonds and the market for CDS on the country's bonds can be used as sources of data to derive a credit spread for the country.

A sovereign CDS contract provides a payoff to the long position if a default or a credit migration of the reference entity occurs.