Definition
International bonds are debt securities issued by a country or company outside of the investor’s home country. They are typically denominated in the currency of where it’s issued and aim to attract foreign investors. These bonds are part of the larger sector known as fixed-income securities, where borrowers pay lenders fixed interest payments until maturity, at which point the principal is repaid in full.
Key Takeaways
- International Bonds are bonds that are issued in countries outside of the issuer’s home country for the purpose of raising capital. They are accessible to global investors and can be issued in a variety of currency denominations for more flexibility.
- There are three primary types of international bonds: Foreign bonds, Eurobonds, and Global bonds. Foreign bonds are issued by international entities in another country and are usually denominated in the host country’s currency. Eurobonds are issued in a currency other than that of the country in which it is issued. Global bonds are available for sale globally.
- Investing in international bonds can provide benefits such as portfolio diversification and potentially higher return opportunities. However, they come with risks like currency risk, political risk, and economic instability risk in the host country.
Importance
International bonds are important because they provide opportunities for diversification, investment, and financing at a global level.
By issuing bonds in foreign markets, companies and governments can tap into larger sources of capital, potentially securing lower borrowing costs or targeting investors with specific investment criteria.
They allow investors across the globe to invest their money in foreign projects or companies, thereby spreading risk and broadening their investment portfolio.
Furthermore, these bonds often have different interest rates and maturity dates than domestic bonds, providing versatile investment options.
Their significance lies both in providing funding for issuers and broadened investment possibilities for investors.
Explanation
International bonds serve as an integral tool for both countries and corporations to raise capital beyond their domestic markets. They play significant roles in global economic growth, offering countries or firms the opportunity to borrow money on different terms than what may be available in their home country.
For instance, a firm may choose to issue bonds in a foreign market if the interest rates are lower there, enabling them to save money on borrowing costs. Sometimes, issuing bonds in international markets also helps diversify the investor base, which may reduce the borrowing risk and potentially secure more favorable terms.
From the investor’s perspective, international bonds can provide diversification benefits. By investing in international bonds, investors can not only potentially achieve higher returns than those offered by their home country’s bonds, but also open opportunities to invest in various sectors, thus reducing risk associated with the concentration of investments in a single market.
This type of bond issuance also strengthens financial integration, allowing money to flow more effortlessly in the global economy, which further encourages economic development.
Examples of International Bonds
Eurobond: These are a common example of international bonds. A Eurobond is issued in a currency different than the native currency of the country where it is issued. For example, a bond issued in dollars in Europe is a Eurobond. A frequently cited example of this is the first Eurobond, the Autostrade bond, issued by Autostrade Company for the Italian Motorway network in
Foreign Bonds: These bonds are issued by a foreign borrower and are denominated in the currency of the country in which they are issued. They obey the regulations of the host country and are marketed there. For instance, Yankee bonds, issued by foreign entities in the US market and denominated in USD, and Samurai bonds, issued by non-Japanese companies in Japan, are denominated in JPY.
Global Bonds: They are simultaneously issued in multiple countries outside the issuer’s home country. An example is a bond issued by World Bank (International Bank for Reconstruction and Development), which raises money by selling bonds to investors around the world, and then lends that money to developing countries to finance various improvement programs.Please note that while these types of bonds can be purchased by any type of investor, they’re also used by governments and multinational corporations as a means to secure capital.
FAQs on International Bonds
1. What are International Bonds?
International bonds are bonds issued in a domestic market by a foreign entity, in the domestic market’s currency. Companies, governments, or international institutions can issue these. International bonds offer a way to diversify and expand portfolios.
2. Are International Bonds a good investment?
Whether international bonds are a good investment or not depends on the investor’s financial goals and risk appetite. They can sometimes offer higher yields compared to domestic bonds and also serve as a good tool for portfolio diversification but can come with additional risks associated with currency fluctuations and political instability.
3. What is the risk associated with International Bonds?
Some of the main risks associated with international bonds include currency risk, where changes in exchange rates can affect the value of the bond, and political risk, where changes in government, policy, or political stability can impact the bond’s value. Additionally, there may be economic risks if the issuing country’s economy experiences a downturn.
4. How do I buy International Bonds?
Investors can purchase international bonds through a brokerage account or through mutual funds or exchange-traded funds (ETFs) that invest in these types of bonds. Advice from a financial advisor is recommended when investing in international bonds due to their associated risks.
5. How do International Bonds differ from Domestic Bonds?
International bonds typically differ from domestic bonds based on the currency in which they are denominated and their exposure to foreign economies’ risks and opportunities. On the other hand, domestic bonds are denominated in domestic currency and are subject only to the risks and opportunities of the domestic economy.
Related Entrepreneurship Terms
- Foreign Bonds
- Eurobonds
- Global Bonds
- Sovereign Bonds
- Yankee Bonds
Sources for More Information
- Investopedia: Investopedia offers a broad range of content about international bonds including definitions, references, and examples.
- Financial Times: Financial Times contains a wealth of news and feature articles about international bonds and global financial markets.
- Bloomberg: Bloomberg is a major global provider of 24-hour financial news and information, including substantial coverage of international bonds.
- The Balance: The Balance provides accessible, easy-to-understand content about international bonds and other finance-related topics.
