What are International Bonds?

International bonds are debt instruments issued by a non-domestic company to raise money from international investors and are usually denominated in the currency of the issuing country with the primary objective of attracting more investors on a large scale.

Types of International Bonds

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#1 – Eurobond

The first type of international bond is a bondBondBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more denominated in a different currency than the domestic currency of the country or market in which it is issued. It doesn’t have to be denominated in EUR. EurobondsEurobondsA eurobond refers to a bond issued in a country in a currency different from its legal tender. It acts as a fixed-income debt instrument or security in the eurocurrency market and comes with a maturity of 5-30 years. These bonds carry lower interest rates and zero forex risk.read more can have the following differences between the issuer, denomination, and the country in which it is being issued:

  • Issuer (Issuing company’s nationality)Bond’s Denomination (currency)The country in which it is being issued

An example would be a Spanish Bank (A) issuing a Japanese yen-denominated bond (B) in London (C).

#2 – Foreign Bond

A Foreign Bond is a bond that is issued in a domestic market in domestic currency by a Foreign Entity. Foreign bonds can have the following differences between the issuer, denomination, and the country in which it is being issued:

  • Issuer (Issuing company’s nationality)The country in which it is being issued

The denomination of the bond will be Country B’s currency. An example would be a French Company (A) issuing a US dollar bond in the US.

#3 – Global Bond

The third type of international bond is a bond issued by a foreign investor in a different currency other than the home currency. It is also being issued in a market for which the currency is domestic simultaneously. Global bonds can have the following differences between the issuer, denomination, and the country in which it is being issued:

  • Issuer (Issuing company’s nationality)What is the denomination of bonds (currency), and for which country is this currency local?The country in which it is being issued

An example would be an Australian Bank (A) issuing a GBP Bond (B’s currency) in London (B’s country) and Japan (C).

Advantages of International Bonds

  • Diversification – On investing in a foreign bond, we take on some exposure to different countries. The correlation between the domestic economy and the economy whose bond we have purchased is typically low. Hence, in case of any political or economic crisis, one economy may not impact the other economy. In this way, the investor will be able to diversify their portfolio.Foreign Market Exposure – An investor interested in investing in foreign markets can use International bonds as one way to gain exposure. Hence, the investor could benefit if the economy he invested in grew.High Yield – International Bonds sometimes have a high risk compared to domestic bonds, which offer high returns. This could be a good opportunity for the ones who are interested in high returns by taking a high risk.Hedging – If an investor has already invested in a foreign economy, then there is always an exposure to exchange rate riskExchange Rate RiskExchange Rate Risk is the risk of loss the company bears when the transaction is denominated in a currency other than the company operates. It is a risk that occurs due to a change in the relative values of currencies.read more. Investing in such economies by using Bonds can be suitable to hedge the exposure.

Disadvantages of International Bonds

  • Country Risk – Investing in International bonds brings up an additional risk due to government or market instability of the economy. Sudden political changes can also result in losses.Risks that hard to quantify and correlated – International Bonds may be used to diversify the portfolio, which can be found suitable when conditions are good. But in cases of Economic crisis, it is hard to quantify the risk and find the correlation.Currency Volatility – Due to the involvement of currency exchange-rate in International Bonds, there is always an additional risk involved due to currency exposures.Transaction costs are high – Here, we are going across the country and trying to deal with Brokers and Market makersMarket MakersMarket makers are the financial institution and investment banks which ensures enough amount of liquidity in the market by maintaining enough trading volume in the market so that trading can be done without any problem.read more in other countries so that the transaction costs may be higher.Liquidity is often Low – Fewer people are interested in investing in International bonds; therefore, liquidity is often low compared to domestic bonds.

Conclusion

International bonds are very much suitable for diversifying the portfolio at the international scale, gaining exposure to foreign securities, high returns, and if the investor wants to hedge his exposure in a foreign economy. But at the same time, International bonds bring up the currency and country-specific risks. Also, the Investor has to be aware of international market concerns and geopolitical and economic risksEconomic RisksEconomic Risk is the risk exposure of an investment made domestically or abroad. These risks could be macroeconomic factors like government policies or collapse of the current government and major swing in the exchange rates.read more before investing in such bonds.

This has a guide to What international bonds are and their Definition. Here we discuss the international bond types along with their characteristics, advantages, and disadvantages. You can learn more about it from the following articles –

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