Investing can be confusing, especially if you're not familiar with what stocks and bonds are. While stocks give you a stake in a company, bonds are loans or IOUs. Often, bonds are issued by governments to help cover their costs, and they're generally considered a lower-risk investment since a government is usually likely to cover all their debts. However, companies can also issue bonds, both domestically and within foreign countries.
With all these options, understanding the different types of bonds can be tricky. There are many types of bonds issued by domestic governments at the local, state and federal levels, as well as domestic companies. However, since the financial markets are now global, many bonds deal with more than one country and currency.
What Is A Eurobond?
If you hear the term Eurobond you might assume that the note was issued in Europe or has to do with European markets. However, that isn't necessarily the case. A Eurobond is simply a bond that is issued in a currency that is different from the main currency in the country or market that it was issued in. For example, a bond that is written in U.S. dollars but issued in a foreign country is a Eurobond, even if the bond was not issued in Europe. Most Eurobonds are issued in U.S. dollars or Japanese yen, and Eurobonds make up about 30 percent of the global bond market.
What Is A Foreign Bond?
A foreign bond is issued by a foreign entity in a certain country, issuing the currency of that country. For example, a company from Asia can issue a foreign bond in Great Britain, and the bond will be issued in British pounds.
What Are The Advantages and Disadvantages of Eurobonds?
When an entity is raising funds using Eurobonds, the entity can choose which country the bond is issued in. This gives them the ability to choose a country that has better interest rates, a more stable market and regulations that align with the entity's needs. In addition to being advantageous for the entity issuing the bond, Eurobonds are a good option for the investors who buy them because they are generally easy to sell. These bonds are usually underwritten by a financial institution, making them a fairly safe investment option. However, because of the relatively low risk associated with Eurobonds, they usually have lower rates of returns than other, riskier investments.
What Are The Advantages and Disadvantages of Foreign Bonds?
Foreign bonds are considered less stable than Eurobonds because they can be affected by political turmoil, interest rate fluctuations, currency exchange rates and inflation. For investors, foreign bonds can be advantageous because they allow more diversification of an investment portfolio by adding a foreign investment without having to worry about exchanging currency since the bond is bought in the currency of the country that it's issued in.
Kelly Burch is a freelance journalist living in New Hampshire. Her writing on educational issues has appeared on Bright, The Washington Post, We Are Teachers and School Leaders Now.