Question B4

(a) Briefly discuss the risk of default for the following sovereign bonds:(10 marks)

• (i) US government bonds;
• (ii) Italian government bonds;
• (iii) Japanese government bonds;
• (iv) China's central government bonds and China's local government bonds;
• (v) Mexican government bonds; and
• (vi) Indonesian government bonds.

(b) During the European Debt Crisis, what happened to the default risk, the prices and the yields of the Greek government bonds? For those banks holding the Greek sovereign bonds, what will be the effect of the above changes on their income statements and balance sheets? The percentage of Greek sovereign bonds in the northern European banks' balance sheet was in fact relatively small. Why were these northern European banks and their governments so worried about the above changes in Greece?(15 marks) (TOTAL: 25 marks)