What Is an International Bond?
An international bond is a debt obligation that is issued in a country by a non-domestic entity. Generally, it is denominated in the currency of its issuer’s native country. Like other bonds, it pays interest at specific intervals and pays its principal amount back to bondholder at maturity.
International bonds are generally corporate bonds. Many mutual funds in the United States hold these bonds.
key takeaways
- An international bond is a debt obligation that is issued in a country by a non-domestic entity in its native currency.
- International bonds are usually corporate bonds.
- International bonds can offer portfolio diversification, but are highly subject to currency risk.
Understanding an International Bond
As the business world becomes more globalized, companies now have ways to access cheaper sources of funds and financing outside of their country of operations. Instead of relying on investors in their own domestic markets, businesses and governments can tap into the pockets of global investors for much-needed capital. One way through which companies can access the international lending scene is by issuing international bonds.
An international bond is issued in a country and currency that is not domestic to the investor. From the perspective of a domestic investor and resident of the United States, an international bond is one that is issued by corporations or governments in other countries denominated in a currency other than the U.S. dollar. These bonds are issued outside of the United States and are generally backed by the currency of the native country.
Types of International Bonds
Several varieties of international bonds exist.
Eurobonds
Eurobonds are debt issued and traded in countries other than the
country in which the bond’s currency or value is denominated in. These
bonds are often issued in a currency that is not the domestic currency of the
issuer.
As the name implies, these bonds generally are issued by companies on the European continent, or in the European Union, but they can trade in non-European countries, too. For example, a French company that issues bonds in Japan denominated in U.S.
dollars has issued a Eurobond, more specifically, a Eurodollar bond. Other types of Eurobonds are the Euroyen and Euroswiss bonds.
Global Bonds
Global bonds are similar to Eurobonds, but they can also be traded and
issued in the country whose currency is used to value the bond. Drawing
from our Eurobond example above, an example of a global bond
will be one in which the French company issues bonds denominated in the
U.S. dollar and offers the bonds in both Japan and America.
Brady Bonds
Brady bonds are sovereign debt securities, issued by developing countries but denominated in U.S. dollars and backed by U.S. Treasury bonds. Part of a global program developed in 1989, Brady bonds are a means to help countries with emerging or embattled economies better manage their international debt.
International Bonds vs. Foreign Bonds
Although they sound similar, and are sometimes used interchangeably, international bonds and foreign bonds are not the same. Foreign bonds are issued in a domestic market by a foreign issuer—but in the currency of the domestic country. For example, a bond that is issued in Canada and valued in Canadian dollars by a U.S. company is a type of foreign bond.
Often, foreign bonds bear cute names, reflecting the local currency or country they’re issued in. The bond in our example above would be referred to as a Maple bond. Other types of foreign bonds include:
- Samurai bond (issued in Japanese yen)
- Yankee bond (issued in U.S. dollars)
- Matilda bond (issued in Australian dollars)
- Bulldog bond, (issued in British pounds sterling)
Special Considerations
International bonds are a great way to diversify one’s portfolio as
investors can gain exposure to foreign securities that may not
necessarily move in tandem with securities trading on local markets. However, since international bonds are typically denominated and pay interest in a foreign currency, the value of the bond will fluctuate depending on the economic conditions and exchange rates between the domestic host country and the foreign country that houses the issuer. These bonds are, therefore, subject to currency risk. Investors should take caution when investing international bonds because they may be subject to different regulatory and taxation requirements than the ones with which the investor is familiar.