What is a 'Foreign Bond'

A foreign bond is a bond issued in a domestic market by a foreign entity in the domestic market's currency as a means of raising capital. For foreign firms doing a large amount of business in the domestic market, issuing foreign bonds, such as bulldog bonds, Matilda bonds and samurai bonds, is a common practice. Since investors in foreign bonds are usually the residents of the domestic country, investors find the bonds attractive because they can add foreign content to their portfolios without the added exchange rate exposure.

BREAKING DOWN 'Foreign Bond'

Because investing in foreign bonds involves multiple risks, foreign bonds typically have higher yields than domestic bonds. Foreign bonds carry interest rate risk. When interest rates rise, the market price or resale value of a bond falls. For example, say an investor owns a 10-year bond paying 4% and interest rates increase to 5%. Few investors want to take on the bond without a price cut for offsetting the difference in income.

Foreign bonds also face inflation risk. Buying a bond at a set interest rate means the real value of the bond is determined by the amount of inflation taken away from the yield. For example, say an investor purchases a bond with a 5% interest rate during a time when inflation is 2%. The investor’s real payout is the difference of 3%.

Currency risk is also an issue for foreign bonds. When income from a bond yielding 7% in a European currency is turned into dollars, the exchange rate may decrease the yield to 2%.

For political risk, investors should consider whether the government issuing the bond is stable, what laws surround the bond’s issuance, how the court system works and additional factors before investing. Foreign bonds face repayment risk. The country issuing the bond may not have enough money to cover the debt. Investors may lose some or all of their principal and interest.

Examples of Foreign Bonds

A bulldog bond is issued in the United Kingdom, in British pound sterling, by a foreign bank or corporation. Foreign corporations raising funds in the United Kingdom typically issue the bonds when interest rates in the United Kingdom are lower than those in the corporation’s country.

A Matilda bond is a bond issued in the Australian market by a non-Australian company. For example, in June 2016, Apple Inc. sold $1.4 billion in notes maturing in June 2020, January 2024 and June 2026. Apple joined other companies such as Qantas Airways Ltd., Coca-Cola Co. and Asciano Ltd. in selling securities past the seven-year mark that had been the limit for many nonfinancial corporate borrowers in recent years.

A samurai bond is a corporate bond issued in Japan by a non-Japanese company. For example, in May 2016, French bank Societe Generale SA sold $1.1 billion in samurai bonds, including senior and subordinated bonds maturing in seven years. The sale followed Bank of America Corporation’s $1.08 billion offering in a euro-yen format earlier that month.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Maple Bond

    A bond denominated in Canadian dollars that is sold in Canada ...
  3. Dollar Price

    The percentage of par, or face value, at which a bond is quoted. ...
  4. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  5. Extendable Bond

    A long-term debt security that includes an option to lengthen ...
  6. U.S. Savings Bonds

    A U.S. government savings bond that offers a fixed rate of interest ...
Related Articles
  1. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  2. Investing

    Spice Up Your Portfolio With International Bonds

    Going global can add flavor and diversity to an otherwise bland basket of bonds.
  3. Investing

    How Exchange Risk Affects Foreign Bonds

    Investors include foreign bonds in their portfolios to take advantage of higher interest rates or yields, and to diversify their holdings. However, the higher return expected from investing in ...
  4. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  5. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  6. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  7. Investing

    U.S. Corporate Bonds: The Last Safe Place to Make Money

    There aren't many other sources right now for relatively safe, steady income.
  8. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  9. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
RELATED FAQS
  1. What causes a bond's price to rise?

    Learn about factors that influence the price of a bond, such as interest rate changes, credit rating, yield and overall market ... Read Answer >>
  2. How does face value differ from the price of a bond?

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par ... Read Answer >>
  3. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
  4. Do long-term bonds have a greater interest rate risk than short-term bonds?

    The answer to this question lies in the fixed income nature of bonds and debentures, often referred to together simply as ... Read Answer >>
Hot Definitions
  1. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  2. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  3. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
  5. Border Adjustment Tax

    A tax levied on goods based on where they are sold – exported goods are exempt from tax; those imported and sold in the ...
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center