investing has existed for centuries. There was little activity for much of
the 20th century, due to
capital and currency controls, but the 1973 collapse of the Bretton
Woods system opened the door for the emergence of today's active markets.
This article describes the types of instruments that are traded.
Most countries have some system of financial regulation
that applies to securities issued for sale to domestic investors (see
United States and
regulations). Domestic bonds are
issued in a country by a domestic issuer for domestic investors. They are
denominated in that country's currency and are subject to that country's
regulations. Some investors purchase another country's domestic bonds. To
do so effectively, they must understand that country's trading, settlement
and accounting practices. They may have to deal with inconvenient
time-zone and language differences. The bonds pose foreign exchange risk,
and securing reliable credit
information can be difficult.
Some bond issuers explicitly want to attract foreign
investors. They issue what are known as foreign
bonds. These are bonds issued in one country and denominated in
that country's currency by a foreign issuer. The issuer must satisfy all
regulations of the country in which it issues the bonds. An example is
Yankee bonds, which are foreign bonds sold
by some corporations, but mostly
by supranational agencies or foreign governments, to investors in the
United States. Bulldogs,
and samurais are foreign bonds issued in the
United Kingdom, Spain, the Netherlands and Japan, respectively.
A Eurobond is something
different. It is not a foreign bond issued within the European Union.
Rather, it is a bond issued and traded within the mostly unregulated
Euromarket. While that market originated within Europe—and is still
largely centered there—it is a truly international market. Transactions
are not subject to any particular nation's regulations. Bonds are issued
form and usually pay annual (as opposed to semiannual)
coupons. They are denominated in
various currencies. Since the launch of the euro in 1999, many European
corporations have turned to the Eurobond market to diversify their funding
away from bank loans. In this way, the Eurobond market has become both an
international market and somewhat of an unregulated domestic bond market
the foreign bond and Eurobond markets lead to the development of
global bonds. These are bonds that blend
characteristics of foreign bonds and Eurobonds and are issued in both
Emerging market debt
is debt that is issued by governments or corporations in countries whose
economies are striving to emerge from under development. The sector
includes domestic bonds, but foreign investors primarily buy bonds issued
as Eurobonds or global bonds. Credit
risk is a significant issue, and many outstanding bonds are
restructured bank loans or restructured defaulted bonds.
agency security A
security issued by a US federal agency or government sponsored enterprise.
bond Securitized debt.
registered and bearer bonds Three forms of bonds differing in
how ownership is evidenced.
A bond issued by a corporation.
credit risk Risk due to
uncertainty in a counterparty's ability to meet its obligations.
interest rate swap
A swap under which both cash flow streams are in the same currency and are of a
nature that might be associated with some fixed income
A bond whose credit rating is below BBB-.
note A debt security issued through shelf-registration under
backed security A security interest in
A debt security issued by a local government or its agencies or authorities in
the United States or its territories.
The process of pooling assets and selling interests in the pool to
A loan made collectively by a group of lenders to a single borrower.
US Federal Government debt obligation issued by the Department of Treasury.
bond A bond that pays no coupons, pays its par value at
maturity and is issued at a discount.
is the standard reference on bonds.
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