What Is a Dollar Bond?
A dollar bond is a U.S. dollar-denominated bond that trades outside of the United States. Along with the principal, any coupon payments from the bond are paid in U.S. funds.
A dollar bond may also refer to a municipal bond which has its price quoted in dollars, rather than on its yield to maturity.
- A dollar bond is a bond issued outside of the U.S., by a foreign company or government, that is denominated in U.S. dollars instead of their local currency.
- Dollar bonds are used to attract a greater breadth of investors since there will be less currency risk for U.S.-based creditors.
- Dollar bonds, however, carry greater risk for foreign issuers who are exposed to currency risk in addition to the typical credit risk.
- Municipal bonds that are quoted according to their dollar price rather than yield are also known as dollar bonds.
Understanding Dollar Bonds Outside of the U.S.
A dollar bond, also referred to as a dollar-denominated bond, denotes the fact that it is issued outside of the U.S. by U.S. entities or within the U.S. by foreign corporations and governments. Dollar bonds can command wider participation, and hence a larger market, than securities denominated in other currencies. The market for dollar bonds issued by U.S. firms outside of the country provides a platform through which issuers could gain access to capital from foreign investors.
Investors in the U.S. bond market often find dollar bond issues from foreign issuers attractive not only because they are denominated in dollars, but also because yields on the dollar issues offered in the U.S. market are often higher than those on bonds of the same governments or corporations issued in their domestic markets. Non-U.S. firms and governments will often issue bonds denominated in U.S. currency in a bid to attract U.S. investors or hedge currency risks.
There is less currency risk on dollar bonds for U.S.-based investors looking to access international debt markets when compared to the purchase of non-U.S. denominated bonds.
In November 2017, Chinese e-commerce company Alibaba Group Holding Ltd, borrowed $7 billion when it sold dollar bonds to U.S. investors. The bonds were sold with various maturities ranging from 5.5 years to 40 years. The 10-year bonds that mature in 2027 demanded an additional 1.08 percentage points over Treasuries. The company made the move to issue dollar bonds following an increase in the cost of borrowing for companies in the Asian markets.
The U.S. market offered a way for the company to raise capital at low cost, but at higher than average yield for investors. Alibaba’s dollar bond issue had higher yields than those from Alibaba’s U.S. tech peers, such as Amazon.
Municipal Dollar Bonds
Municipal revenue bonds are the only types of bonds that use a dollar bond convention. A revenue bond is one that backs its stream of interest and principal payment obligations to investors with the cash flows generated from a specific source or project. These bonds are quoted by price, compared to other types of bonds that are quoted by the bond's yield to maturity.
For example, suppose that a 10-year muni bond has a current yield to maturity of 3.83% and a current price of $4,850. If this bond were quoted in terms of yield it would be quoted as 3.83%, but if it was quoted in dollar terms the bond would be quoted as $4,850. The latter method of quotation is simpler, more straightforward, and expected income and earnings can be estimated precisely using concrete terms.