When making an investment, stocks tend to be a popular choice. Bonds are another option. A bond is a loan, a form of debt, or even something as simple as an IOU. Instead of dealing with a bank, when you purchase a bond, you’re acting as the bank.
With a bond, whether it is a foreign bond, a Eurobond, or some other format, you are loaning money to a company or to a government entity under the promise that you’ll be paid back in full for the amount. Over the life of the bond, you’ll also receive interest payments that help you to build more financial wealth.
Bonds are considered a relatively safe form of investing when compared to stocks. They will create a steady stream of income from the initial investment as well. For the average investor, a standard recommendation is to have at least 15% of your portfolio include bonds.
If you’re thinking about adding bonds to your investment activities, here is a closer look ath foreign bonds and Eurobonds.
What Is a Foreign Bond?
A foreign bond is a long-term bond that can be issued by governments or companies which are outside of their home country. If a U.S. company were to issue a bond that was denominated in Canadian dollars, then sold to investors in Canada, then a foreign bond would be issued.
What is unique about the foreign bond is that it is usually denominated in the currency of where it is expected to be sold. Many companies issue foreign bonds in the U.S. Dollar because they seek out investors from the United States to fuel their operations.
Foreign bonds may be subject to disclosure requirements, trading regulations, and securities regulations as they are traded on national markets.
What Is a Eurobond?
A Eurobond is a long-term bond. It is issued and sold outside the country where it has been denominated. Although the implication from the name indicates that Europe is involved, any country can create a Eurobond. If an organization in the United States were to use a bond that was denominated in dollars, then sold that bond to investors in the United Kingdom, then it would qualify as a Eurobond.
The same would be true if that company sold that bond to South Korean investors.
Multi-national companies often issue Eurobonds as a way to finance their global operations. It is very common to issue a Eurobond from one country where they have a presence, then sell it to another country where there are offices as well.
Governments can issue Eurobonds for financing if the wish. At the time of writing, Eurobonds make up about 30% of the total bond market around the world.
Why the Differences Are Important
Foreign bonds and Eurobonds are two separate investment options. Far too often, however, the terms are used interchangeably. That is because foreign bonds were issued long before the first Eurobonds even existed.
For some investors, a foreign bond is referred to as an international bond. Eurobonds are also referred to as an international bond. For beginning investors, the similarities in these labels is what leads to high levels of confusion.
Then you have the nicknames of the different bonds that become problematic for investors as well. You may have seen some of these terms used to describe bond investment activities in the past.
- Yankee bonds. These bonds are issued in U.S. Dollars, but created by non-American borrowers in the United States.
- Samurai bonds. These bonds are denominated in yen, but then issued by non-Japanese borrowers in Japan.
- Bulldog bonds. These bonds are issued in pounds sterling by non-British borrowers in Britain.
In the three examples listed above, you are looking at foreign bonds. These are not Eurobonds.
Why Choose Foreign Bonds
Foreign bonds have numerous influences on their value. This makes the bond more unstable when compared to Eurobonds. That also means investors have more opportunities to profit from their investment.
Inflation, currency exchange rates, interest rate fluctuations, and even local politics may all affect the overall value of the foreign bond before, during, or after issuance.
The reason why foreign bonds are advantageous is because they offer more diversification opportunities. You’re able to add a foreign investment to your portfolio without worrying about the need to exchange currencies. You’re purchasing the bond in your home currency, which means there are set values which are easy to calculate.
Why Choose Eurobonds?
When issuing a Eurobond, the company or government agency can choose a specific nation to target for denomination. There are several factors to consider when looking at which country to target. Favorable interest rates, regulations, a stable market, or the presence of likely investors can all play a role in the decision to create a Eurobond.
Eurobonds tend to be underwritten by financial institutions. For the average investor, that makes them a safer investment option. Because these bonds have lower risk factors associated with them, the return for an investor can be very conservative. In times of economic recession, some Eurobonds have even been known to issue a negative return to the investor.
How to Maximize Your Bond Investment
One consideration that must be in play when making bond investments is the length of time you intend to hold the bond. A bond with a longer duration will often pay higher yields. That is because there is more risk associated with the investment because your money is tied up for a longer time period.
If you invest into a 10-year bond, you’ll receive a higher yield when compared to an investment into 1-year bond.
The biggest issue here, however, is the interest rate. If interest rates begin to rise, then the prices of bonds begin to fall. Rates climbing equates to new bonds being issued at a higher rate. Any existing bonds that are already issued at a lower rate are now less valuable from a trading perspective.
You can also choose to hold onto your bond until it matures. Even if the prices fluctuate wildly, you’ll still receive the face value of the bond back, plus whatever interest payments were part of the agreement. The only reason why this would not happen is if the issuer of the bond became unable to meet their obligations.
By knowing the difference between foreign bonds and Eurobonds, you’ll be able to evaluate risks in the bond market better. You’ll know what options are best for your current portfolio. Then you’ll be able to make a wise decision with your financial advisor about the next steps to take.