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. If 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. 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 Yield

    Bond yield is the amount of return an investor will realize on ...
  2. Global Bond

    A global bond is a type of bond that can be traded in a domestic ...
  3. Bond Market

    The bond market is the environment in which the issuance and ...
  4. Discount Bond

    A discount bond is a bond that is issued for less than its par ...
  5. Benchmark Bond

    A benchmark bond is a bond that provides a standard against which ...
  6. Bond Buyer 20

    Bond Buyer 20 is a representation of municipal bond trends based ...
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

    Corporate Bonds for Retirement Accounts

    Corporate bonds are usually the preferred choice in retirement accounts. Here are some of the benefits of corporate bonds, and strategies for a portfolio.
  3. Investing

    How Currency Risk Affects Foreign Bonds

    Foreign bond investors take advantage of higher interest rates diversifying their holdings. Learn about the increased risk from currency instability.
  4. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  5. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  6. 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.
  7. Investing

    Six biggest bond risks

    Bonds can be a great tool to generate income, but investors need to be aware of the pitfalls and risks of holding corporate and/or government securities.
  8. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  9. Investing

    How Bonds Are Vital to a Successful Portfolio

    While bonds are a vital part of an investment portfolio, they are often ignored.
  10. Investing

    How to Manage Risk With Bonds in Your Portfolio

    Bonds are not immune to risk, so be sure to diversify your portfolio with proper asset allocation.
RELATED FAQS
  1. What determines bond prices on the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market and why bond prices and yields ... Read Answer >>
Trading Center