International Bonds
What Is an International Bond?
International bonds are debt obligations issued by borrowers from a country other than the one where the bond is sold.
An international bond is a debt security issued in a country by a non-domestic entity. They allow issuers to tap into foreign capital markets and investors to diversify their holdings geographically. There are three main categories: 1. **Eurobonds**: Bonds issued in a currency other than the currency of the country where they are issued (e.g., a US dollar-denominated bond issued in London). 2. **Foreign Bonds**: Bonds issued in a domestic market by a foreign entity, in the domestic market's currency (e.g., a "Yankee bond" is a bond issued by a non-US entity in the US, in US dollars). 3. **Global Bonds**: Bonds issued simultaneously in several markets.
Key Takeaways
- Issued by foreign governments or corporations.
- Can be denominated in the issuer's domestic currency or the investor's currency.
- Include Eurobonds, Foreign Bonds, and Global Bonds.
- Provide diversification and potential yield advantages.
- Subject to currency risk if not denominated in the investor's home currency.
How International Bonds Work
Like domestic bonds, international bonds pay regular interest (coupons) and return the principal at maturity. However, the mechanics can be influenced by the currency of issuance. If a US investor buys a German government bond denominated in Euros (a "Bund"), they must convert dollars to euros to buy it. They receive coupon payments in euros, which they must convert back to dollars. Finally, at maturity, they receive the principal in euros. This means the investor's return is tied not just to the bond's interest rate, but also to the EUR/USD exchange rate.
Types of International Bonds
Comparison of common international bond types.
| Type | Issuer | Market | Currency |
|---|---|---|---|
| Eurobond | International | International | Non-native to market |
| Yankee Bond | Non-US | United States | US Dollar |
| Samurai Bond | Non-Japanese | Japan | Japanese Yen |
| Bulldog Bond | Non-UK | United Kingdom | British Pound |
Advantages and Disadvantages
**Advantages**: * **Diversification**: Reduces portfolio risk by spreading exposure across different economies. * **Yield**: Access to countries with higher interest rates. **Disadvantages**: * **Currency Risk**: Exchange rate moves can erode returns. * **Political Risk**: Unstable governments may default or change laws. * **Liquidity**: Some foreign markets may be less liquid than the US market.
Real-World Example: Buying a Yankee Bond
A French automaker needs to raise capital and decides to issue bonds in the United States.
Bottom Line
International bonds are a sophisticated asset class that offers investors access to the global debt market. Whether through Eurobonds, Yankee bonds, or direct foreign investment, they provide opportunities for yield enhancement and risk diversification. However, understanding the nuances of currency denomination and the specific risks of the issuer's country is critical for success.
FAQs
A Eurobond is a bond issued in a currency other than the currency of the country or market in which it is issued. For example, a bond denominated in US dollars but issued in Japan.
A Yankee bond is a bond issued by a foreign entity, such as a bank or company, but is issued and traded in the United States and denominated in U.S. dollars.
Safety depends on the issuer. Bonds from stable governments (like Germany or Canada) are considered very safe, while bonds from unstable regimes or distressed companies carry high risk.
Individual investors typically buy them through mutual funds or ETFs. High-net-worth investors may purchase individual bonds through a broker with access to international markets.
Sovereign debt refers to bonds issued by a national government in a foreign currency to finance the country's growth and development.
Related Terms
More in Government & Agency Securities
At a Glance
Key Takeaways
- Issued by foreign governments or corporations.
- Can be denominated in the issuer's domestic currency or the investor's currency.
- Include Eurobonds, Foreign Bonds, and Global Bonds.
- Provide diversification and potential yield advantages.