Key Characteristics of Foreign Bonds

• Issued in a foreign market but in the local currency of that market.
• Typically listed on the domestic exchange or traded over-the-counter.
• Must comply with the regulations of the domestic market.
• Offer foreign issuers access to cheaper capital and investors more diverse instruments.

Popular Examples of Foreign Bonds

Foreign Bonds vs Eurobonds

• Foreign Bonds: Issued in a foreign country’s domestic market in the local currency.
• Eurobonds: Issued in a market outside the currency’s home country, often in multiple countries simultaneously, and denominated in a foreign currency.

For instance:

• A Bulldog bond is a foreign bond.
• A Eurodollar bond is a eurobond denominated in USD, but issued outside the U.S.

Why Do Issuers Use Foreign Bonds?

1. Access to Cheaper Capital

• Issuers can diversify funding sources and possibly enjoy lower interest rates than in their home markets.

2. Investor Base Diversification

• Foreign bonds help companies build brand visibility and investor trust in new geographies.

3. Currency Matching

• Issuers with operations or revenues in the target market’s currency may choose to issue bonds in that currency to hedge against currency fluctuations.

Why Do Investors Buy Foreign Bonds?

• Diversification

Foreign bonds allow investors to spread risk across economies and reduce dependence on domestic markets.

• Attractive Yields

Some foreign bonds may offer higher yields due to differences in interest rates or credit risk profiles.

• Access to Global Credit Markets

Investors can gain exposure to international issuers, such as multinational corporations or sovereigns.

Risks Associated with Foreign Bonds

1. Credit Risk

• Risk of default by the foreign issuer.

2. Political and Regulatory Risk

• Investors are exposed to the laws and political stability of the issuer's home country.

3. Liquidity Risk

• Foreign bonds may not be as liquid in the local market compared to domestic securities.

4. Information Asymmetry

• Investors may have less access to financial data or business performance of foreign entities.

Foreign Bonds in the Indian Context

While Indian investors typically invest in domestic bonds, high-net-worth individuals (HNIs) and institutional investors may gain exposure to foreign bonds via:

• Global bond mutual funds
• Foreign bond ETFs
• Liberalised Remittance Scheme (LRS) – permitting resident individuals to invest up to USD 250,000 abroad annually.
• Masala Bonds (reverse foreign bonds) – Rupee-denominated bonds issued by Indian firms abroad.
• Foreign bond exposure can offer currency diversification, but investors must carefully assess credit ratings, issuer credibility, and tax implications.

Conclusion

Foreign Bonds serve as a bridge between global capital seekers and domestic investors. For issuers, they provide access to cheaper or more diversified capital. For investors, they offer exposure to international credits without taking direct currency risk, since the bonds are issued in their home currency.

As the Indian investor base grows more sophisticated, interest in foreign bonds, international debt funds, and offshore securities is set to rise. However, investors must understand the underlying risks, regulatory requirements, and market dynamics before adding foreign bonds to their portfolios.