Foreign Bonds

Foreign bonds are debt instruments issued by foreign companies and denominated in the currency of the market where it is being issued. For instance, a German company issuing bonds in Japan denominated in Japanese Yen for investors in Japan. Also known as overseas bonds, investors receive periodic coupon payments and the principal amount is repaid to the investor on maturity, just like regular coupon paying corporate bonds. 

While investing on foreign bonds, it is essential to consider characteristics, investment opportunities, currency exchange risk, compliances, tax on bonds and risks associated with these debt securities. 

Bulldog Bonds 

Bulldog bonds are available in the UK securities market and are denominated in British pounds.These bonds are issued in London by a foreign government or institution and regulated by UK Law. The maturity period usually ranges from 5 years to 25 years.

Yankee Bonds

Yankee Bonds are traded in the US bond market denomianted in U.S. dollar, issued by non-US entity. The U.S. Securities and Exchange Commission (SEC) regulates yankee bonds, requiring bond issuers to follow U.S. regulations and obtain mandatary credit ratings from American agencies.

Samurai Bonds

Samurai Bonds are issued in Japan by non-Japanese entities denominated in yen, adhere strictly to Japanese financial rules and regulations. These bonds allow foreign companies to raise funds at lower interest rates compared to their domestic markets or dollar denominated loans.

Masala Bonds

Masala Bonds are rupee-denominated bonds issued by Indian entities in overseas markets. These bonds are different from traditional foreign bonds. The capital raised through masala bonds is in Indian Rupees. These bonds are available to investors from outside India seeking to invest in the Indian bond market. These bonds are usually issued through private placement or listed on overseas exchanges, in accordance with the regulations of the host country.

Other Types of Foreign Bonds

Currency Exchange Risk

Currency fluctuations in the foreign market can significantly affect the investor’s returns. The cash flows on bonds are in the foreign currency but if the foreign currency weakens compared to investor’s home currency, it can impact the overall return of the bond. For instance, a bond offering 6% returns in a foreign currency might only yield 3% when converted back to the investor’s home currency due to unfavourable economic conditions. 

Credit Risk

Just like other types of bonds, foreign bonds carry the default or credit risk i.e., delays or fails to make repayments. Investors should assess the bond issuer’s financial strength, evaluate statements and bond credit rating mentioned in offer document or shelf prospectus. Bonds having higher credit rating have lower credit risk and vice versa.

Interest Rate Risk

The bonds and market interest rates are inversely related. When market interest rates rise, the value of existing bonds usually falls, as newer bonds offer higher coupon/interest rates. This risk is higher for the investors holding bonds having longer maturity period.

Prepayment Risk

Callable bonds or bonds having callable feature in their offer document allow issuers to repay the principal and interest before their maturity dates. Issuers usually call bond during a falling interest rate regime. The investor then receives their principal back before maturity than expected and is forced to reinvest the procceds in a lower coupon rate environment.

Political Risk

Change in government regulations, political unrest, economic penalties, etc in the foreign country can lead to delays in principal and interest repayments. Political unrest may lead to difficult in debt commitments. This can also affect the market value or price of the bond.