Types of Bonds
International Bond Issues - Eurobonds, Global Bonds, Foreign Bonds
Currency and Bonds
Dual-currency bonds are bonds in which principal payments are in one currency and coupon payments are in another currency. This type of bond is used for foreign bonds, when an issuer issues bonds in a foreign country and makes coupon payments in that country’s currency, but principal payments are made in the currency of the issuer’s country of residence.
From the point of view of an investor in the bond market of the country in which s/he lives, a bond issued in another currency would be a foreign currency denominated bond.
Foreign currency linked bonds are bonds linked to changes in foreign currency. Unlike foreign currency denominated bonds in which case all the payments are made in that currency, for foreign currency linked bonds, the amount is linked to a foreign currency exchange rate. This type of bond is used in countries with unstable or weak currencies.
Investors must carefully consider currency and exchange-rate risk when investing in bonds in foreign currency, i.e. not in the currency of the country in which s/he lives. The risk is that changes in the value of the currency s/he uses to invest and its comparable value against another currency can reduce both the ultimate value of the principal the investor gets back and the value of the regular interest payments that s/he receives. Bond funds that hold global bonds in different currencies may “hedge” against the fluctuation of currencies to reduce this risk. You can see whether the currency risk has been hedged to minimise or eliminate currency risk in a bond product disclosure statement. Consult a financial advisor for more information.