Standard & Poor's sovereign nation debt ratings reflect the opinions of the U.S.-based financial services company on the ability and willingness of governments to fulfill their financial obligations. Just as the company publishes credit ratings for national and international private corporations, so too does it rate governments as long term borrowers on a scale of AAA to D. AAA to BBB are investment grade, considered stable. BB ratings and below are considered to be noninvestment grade, commonly referred to as junk bonds. On the high end (BB), ratings warn investors that a nation is more prone to adverse economic conditions than are its investment-grade peers. lower-end ratings can indicate that the government is highly vulnerable to default (C), has selectively defaulted on one or more obligations (SD), or is under full default (D) and thus is likely to fail to pay most or all of its obligations.

To be clear, sovereign nation ratings are not country ratings. They reflect only the credit risk of national governments, not private issuers within the rated country. Consequently, although government-controlled factors, such as the exchange rate or industry regulations, do undoubtedly affect the private sector operating and financial environment, sovereign nation ratings do not speak to these factors specifically. But because private markets operate on fear, instinct, and panic as much as on logic, they do unfortunately react to nation debt ratings. The merest hint that a nation's debt rating may be downgraded can send stock markets into a tumble, with short-term private stocks faring worse than government bonds.

1. The main purpose of the passage is to

A. demonstrate the unfair effects of debt ratings.
B. emphasize the importance of junk bond ratings in growing markets.
C. persuade readers to invest in AAA- or BBB-rated debt.
D. question the use of sovereign nation debt ratings.
E. explain a type of debt rating and its influence.


2. With which of the following statements would the author most likely agree?

A. A financially sound private company may see its stock lose significant value even if there is no rational expectation that the company's financial prospects are poor.
B. It is unfair to refer to noninvestment grade debt as "junk bonds" because the ratings range from slightly negative to very negative.
C. The nations of the world should not be graded by a U.S.-based company.
D. Investment in BB-rated nations is well worth the risk because payouts can be high.
E. Investors considering private investment opportunities within select nations should ignore the conditions of that nation's public finances.


3. The author includes the sentence about "government controlled factors" (Highlighted) most probably in order to

A. relate the history of sovereign nation debt ratings.
B. discuss the effects of exchange rates on the private sector.
C. show how government regulation hurts business.
D. contradict the idea that ratings show only governments' credit risk.
E. stress that ratings do not reflect private sector data, despite market reaction.