International Bonds

International bonds are debt instruments issued by a non-domestic company to raise money from international investors and are usually denominated in the currency of the issuing country with the primary objective of attracting more investors on a large scale.

• International bonds are debt instruments issued by non-domestic entities to attract funds from foreign investors. Often tied to the issuing country's currency, they aim to attract a broad investor base by tapping into foreign markets.
• International bonds take various forms, including Eurobonds, foreign bonds, and global bonds, each catering to a specific market and investor base.
• These bonds offer opportunities for global portfolio diversification, exposure to foreign assets, potentially high returns, and a means to hedge against foreign economic exposure. However, they also expose investors to risks related to foreign exchange fluctuations and the economic conditions of specific countries. 

#1 - Eurobond

The first type of international bond is a bond denominated in a different currency than the domestic currency of the country or market in which it is issued. It doesn’t have to be denominated in EUR. Eurobonds can have the following differences between the issuer, denomination, and the country in which it is being issued:

1. Issuer (Issuing company’s nationality)
2. Bond’s Denomination (currency)
3. The country in which it is being issued

An example would be a Spanish Bank (A) issuing a Japanese yen-denominated bond (B) in London (C).

#2 - Foreign Bond

A Foreign Bond is a bond that is issued in a domestic market in domestic currency by a Foreign Entity. Foreign bonds can have the following differences between the issuer, denomination, and the country in which it is being issued:

1. Issuer (Issuing company’s nationality)
2. The country in which it is being issued

The denomination of the bond will be Country B’s currency. An example would be a French Company (A) issuing a US dollar bond in the US.

#3 - Global Bond

The third type of international bond is a bond issued by a foreign investor in a different currency other than the home currency. It is also being issued in a market for which the currency is domestic simultaneously. Global bonds can have the following differences between the issuer, denomination, and the country in which it is being issued:

1. Issuer (Issuing company’s nationality)
2. What is the denomination of bonds (currency), and for which country is this currency local?
3. The country in which it is being issued

An example would be an Australian Bank (A) issuing a GBP Bond (B's currency) in London (B's country) and Japan (C).

• Diversification - On investing in a foreign bond, we take on some exposure to different countries. The correlation between the domestic economy and the economy whose bond we have purchased is typically low. Hence, in case of any political or economic crisis, one economy may not impact the other economy. In this way, the investor will be able to diversify their portfolio.
• Foreign Market Exposure - An investor interested in investing in foreign markets can use International bonds as one way to gain exposure. Hence, the investor could benefit if the economy he invested in grew.
• High Yield - International Bonds sometimes have a high risk compared to domestic bonds, which offer high returns. This could be a good opportunity for the ones who are interested in high returns by taking a high risk.
• Hedging - If an investor has already invested in a foreign economy, then there is always an exposure to exchange rate risk. Investing in such economies by using Bonds can be suitable to hedge the exposure.

• Country Risk - Investing in International bonds brings up an additional risk due to government or market instability of the economy. Sudden political changes can also result in losses.
• Risks that hard to quantify and correlated - International Bonds may be used to diversify the portfolio, which can be found suitable when conditions are good. But in cases of Economic crisis, it is hard to quantify the risk and find the correlation.
• Currency Volatility - Due to the involvement of currency exchange-rate in International Bonds, there is always an additional risk involved due to currency exposures.
• Transaction costs are high - Here, we are going across the country and trying to deal with Brokers and Market makers in other countries so that the transaction costs may be higher.
• Liquidity is often Low - Fewer people are interested in investing in International bonds; therefore, liquidity is often low compared to domestic bonds.

International bonds are very much suitable for diversifying the portfolio at the international scale, gaining exposure to foreign securities, high returns, and if the investor wants to hedge his exposure in a foreign economy. But at the same time, International bonds bring up the currency and country-specific risks. Also, the Investor has to be aware of international market concerns and geopolitical and economic risks before investing in such bonds.

This has a guide to What international bonds are and their Definition. Here we discuss the international bond types along with their characteristics, advantages, and disadvantages. You can learn more about it from the following articles –

• International Trade Definition
• Dim Sum Bonds
• Negative Yield Bond
• Premium Bonds
• Coupon Rate vs. Interest Rate