Introduction
International bonds are issued in a country by a foreign entity. Therefore the bond is traded across national boundaries i.e. in different capital markets. Both government and company bonds can be traded in foreign markets. International bonds are classified as euro or foreign bonds
International bonds have been inexistence since 1820 where railway companies and Britain government were the main operators. Recently international bonds have spread globally. They have been facilitated international capital flows. (Moorad , 2001)
This is bond issued and traded within the European market. The bonds are freely traded without any country imposing its regulations. They attract interest annually and they are bearer bonds. They give European companies an alternative way of financing apart from bank loans. The bonds are sold in different currencies. (Moorad , 2001)
Foreign government bonds
These are bonds issued by a country to foreign investors. They are mainly non risk investments and they aim at financing budget deficits. Many governments may not offer government bonds to foreigners. The British government was the first one to issue such bonds in 1963.
Reasons for investing in international bonds
With holding tax: many domestic markets impose with holding taxes on local bonds. Therefore to evade the withholding tax one may decide to invest in international bonds.
Developing countries may not have adequate access to the capital markets of developed countries. Therefore issuing international bonds enables them to obtain foreign capital without struggle. (Slav, 2010)
Some investors wish to trade in foreign currency especially if the local currency value lacks stability. This is because foreign bonds in many cases are issued and traded in foreign currency. Therefore the investor does not fear suffering capital losses arising from unstable currency
Investor may not find local bonds to be attracting adequate interest rates when compared to international bonds. (Moorad , 2001)
Why company decides to issue bonds internationally
Local companies are able to raise adequate capital even when local markets have limited investment base. This will enable them to be assured of expanding their business.
Local company indenting to invest in projects which needs foreign currency may prefer to issue international bonds so as to obtain the required currency. (Richard, B. 1992)
Thirdly, it may reduce cost of financing if issuing the bonds in foreign markets is cheaper than in the local markets. The company must factor in the exchange rate risk associated with this action.
Government may impose a lot of restrictions pertaining issuing bonds locally. Therefore a firm decides to raise capital internationally if it feels local regulations are strict and unfair.
Risks associated with investing in foreign bonds
Sovereign risk: foreign government may devout the bonds bought. This can occur in cases where the government lacks authority to tax citizens to repay national debt. In addition government may lack funds to repay its debts. (Slav, 2010)
Currency risk
The foreign bond looses value in cases where foreign currency value increases relative to local currency. (Slav, 2010)
Political risk
Investing in foreign bonds suffers a blow in case where the foreign country gets into apolitical turmoil. The government may be overthrown and the new government may not have the political will to repay the previous governments debts. To investors who had bought bonds from companies of such countries they may suffer great lose if a new govement wide up the company or the civil war leads to collapse of the company. (Slav, 2010)
Banking risk
Foreign banks may not have adequate currency in your required denomination. In addition foreign banks may collapse due to mismanagement.
Though this risk affects all bonds its impacts is different in different market bonds. The interest risk may rise abruptly if foreign country faces economic problems causing prices of such bonds to fall so fast. (Madura, n.d)
Economic structure risks
Economic structure of foreign country may change. This definitely affects the business operations in the foreign country. The bonds may not be repaid incases where the started projects are stopped. (Madura, n.d)
Factors that have contributed to rise in amount and number of foreign bonds
Government deficits
Many countries have opted for deficit budgeting. These countries issue both local and foreign bonds. They aim at raising enough money for several projects to enable their economies to develop.
Change of micro economies policies
Economic policies have changed in 1970’s and 1980’s this has made many countries to see the importance of acquiring international capitals. Many governments have relaxed their policies concerning acquiring foreign capital.
Market liberalizations have made economies to be interdependent.
Transparence of financial markets
Many countries capital markets are compelled by domestic laws to provide true and fair information to all prospect investors. International investors are therefore in a position to acquire enough information regarding bonds issued in a foreign country.
Main differences between domestic and international bonds
Domestic bonds are issued and traded in one country but foreign bonds are issued and traded in more than one country. For example a company in USA can sell bonds to the citizens of USA only in domestic bonds. (Michael, Mike, and John, 2004).
Domestic bonds are traded in the local currency only but international bonds can be traded in foreign currency e.g euro bonds are traded in any currency which is widely used internationally.
International bonds are issued when the government or company seeks to raise a lot of capital which the local markets may not adequately raise. Domestic bonds aim at acquiring capital locally and issuers hope to get enough capital from local investors. (Michael, Mike, and John , 2004).
Majority of domestic bonds are registered but international bonds are mainly bearer bonds.
Domestic and foreign bonds are listed in local domestic stock exchange but EURO bonds are mainly registered in London or some specified country’s capital markets.
Domestic bonds are mainly secured but international bonds are not secured, though, euro bonds are secured with a negative pledge in many cases.
Conclusion
International bonds have more risks associated with them than domestic bonds; all in all, they attract higher returns as compared to domestic bonds.
International bonds have enhanced capital flow internationally
References
Madura, J., n.d. international financial management: why investors prefer investing in foreign bonds
Michael, J. B., Mike ,B., and John L. T , 2004. UK financial system theory and practice
Moorad ,C., 2001. The bond and money market: strategy trading and analysis
Richard, B. 1992. The development of international bond market
Slav, F., 2010. What are the risks associated with investing in foreign currency bonds
