CFA Level 1

Fixed Income Investments - International Bonds


In general, a country has two bond markets: An Internal Market and an External Bond Market.

The internal market is the mechanism for trading securities within the country in which the issuers are based. This includes the country's domestic and foreign markets.

There are several types of international bonds traded on the External Market:
  • Foreign Bonds - Bonds by issuers who do not reside in the country where they are issued and traded. An example of a foreign would be a bond that is issued by a non-U.S. entity but then trades in the U.S. market. Such bonds can be issued in any currency and can have colorful nicknames such as "Yankee Bonds", which are foreign bonds issued in the U.S., or "Bulldog Bonds", which are sterling-denominated bonds traded in the U.K. foreign bond mark. One last type of a foreign bond is a Supranational. These bonds are issued when two or more central governments issue foreign bonds to promote economic development for the member countries. These include bonds issued by the International Bank for Reconstruction and Development, or World Bank, and the International American Development Bank.
  • Eurobonds - Bonds are bonds issued in a different currency denomination than that of the country in which the bond is issued. Eurobonds are considered the external market for a country, or its international bond market. They are classified by their currency denomination. For example, Eurodollars are denominated in USD while a Euroyen bond would be denominated in Japanese Yen. All Eurobonds have four features:
  1. Underwritten by an international syndicate
  2. When issued, offered simultaneously to investors in a number of countries
  3. Issued outside the jurisdiction of any single country
  4. They are in unregistered form.
  • Global Bonds - A bond that is issued and traded in the foreign bond market of one or more countries as well as in the Eurobond market
  • Sovereign Bonds - Bonds issued by a country's central government. Sovereign bonds tend to be the largest sector of a bond market in any country. They can be issued in their home country, the Eurobond market or the foreign sector of another country. They are typically denominated in the home country's currency, however, they are not required to be. They also have two different ratings:
  1. Local Currency Debt Rating
  2. Foreign Currency Debt Rating
Why two different ratings? The defaults of the bonds tend to differ based on the currency denomination. In general, there are greater defaults on the foreign currency denominated debt. The reason for this is that a government can raise taxes and can control its own financial system. When dealing with a foreign currency, this element of control is lost because the foreign currencies are purchased in the open market. Therefore, if the local currency has depreciated in the markets as compared to the foreign currency, it will be that much harder for an issuer to pay off his obligation.



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