An international bond is a debt investment that is issued in a country by a non-domestic entity. International bonds are issued in countries outside of the United States, in their native country's currency. They pay interest at specific intervals and pay the principal amount back to the bond's buyer at maturity.
Breaking Down International Bond
As the business world becomes more globalized, companies now have ways to access cheaper sources of funds and financing outside of their country of operations. Instead of relying on investors in the domestic markets, businesses and governments can tap into the pockets of global investors for much-needed capital. One way through which companies can access the international lending scene is by issuing international bonds.
An international bond is issued in a country or currency that is not domestic to the investor. From the perspective of a domestic investor and resident of the United States, an international bond is one that is issued by corporations or governments in other countries denominated in a currency other than the U.S. dollar. These bonds are issued outside of the United States and are generally backed by the currency of the native country. International bonds include Eurobonds, foreign bonds, and global bonds.
- Eurobond: this is a bond that is issued and traded in countries other than the country in which the bond’s currency or value is denominated in. These bonds are issued in a currency that is not the domestic currency of the issuer. A French company that issues bonds in Japan denominated in U.S. dollars has issued a Eurobond, more specifically, a Eurodollar bond. Other types of Eurobonds are the Euroyen and Euroswiss bonds.
- Foreign bond: this bond is issued in a domestic market by a foreign issuer in the currency of the domestic country. For example, a bond that is issued in Canada and valued in Canadian dollars by an American company is a foreign bond. To be more specific, the bond in the example is referred to as a Maple bond. Other types of foreign bonds include Samurai bond, Matador bond, Yankee bond, Bulldog bond, etc.
- Global bond: this is similar to the eurobond but can also be traded and issued in the country whose currency is used to value the bond. Drawing from our Eurobond example above, an example of a global bond will be one in which the French company issues bonds denominated in the U.S. dollar and offers the bonds in both Japan and America.
A different type of international bond is the Brady bond, which is issued in U.S. currency. Brady bonds are issued to help developing countries better manage their international debt. International bonds are also private corporate bonds issued by companies in foreign countries, and many mutual funds in the United States hold these bonds.
Since international bonds are typically denominated and pay interest in the currency of the host or domestic country, the value of the bond in the domestic currency will fluctuate depending on the economic conditions and exchange rates between the domestic country and foreign country. These bonds are, therefore, subject to currency risk. Investors should take caution when investing international bonds because they may be subject to different regulatory and taxation requirements than the ones with which the investor is familiar.
International bonds are a great way to diversify one’s portfolio as investors can gain exposure to foreign securities that may not necessarily move in tandem with local securities.