The international bond market market can be defined as a market where domestic as well as international participants buy and sell bonds. A bond market is much larger in comparison to Equity markets in terms of investment. Just like other investment tools, bonds too have risks, indices, returns and volatility factors. The international bond market is expanding as companies find this to be the cheapest way of borrowing money. A company is able to reach more investors by issuing debts on an international scale. The two fundamental factors that are responsible for the growth of the international bond market are: The flow of capital which takes place due to international trading and second the agents that vary the terms such as the currency of denomination, on which they borrow and invest. There are three categories of international bonds:
- Domestic bonds : Domestic bonds are bonds that are traded in local currency. The trade regulations are also followed in the borrower’s country.
- Foreign bonds : Foreign bonds are defined as bonds that are issued in a domestic country by a foreign company and they use the regulations and currency of the domestic country. Foreign bonds usually have some special characteristics such as : a) Issuers are usually governments of the foreign countries and private sector utilities. b) It’s a common practice to underwrite and organize underwriting the risks
- Eurobond : Eurobonds are bonds that are underwritten by an international company using domestic currency and then traded outside the country’s domestic market. They are not sold in any specific national bond market and are usually issued by a group of multinational banks. The place where your Eurobonds are traded is known as the Euromarket. An Eurbond in the US dollar would not be sold in the United States.
The risks associated with bonds are similar to those of equity or other money markets. We are often lured by the fact that by investing in foregn bonds we will be collecting interest income in multiple currencies. However investing in foregn bonds can be extremely risky for novice investors.One of the biggest risk associated with foregn currencies is currency risk.Currency risk means you are subjectected to potential losses which can be caused due to fluctuations in the exchange rates between the currency you hold and the currency you wish to invest in. If not considered this can turn your entire profit into loss. Also do not forget to go through the regulations of investments of the country you’re about to begin investing in. Hence it is always good to take help of brokers/traders for financial advice before you begin investing in international markets.They will guide you correctly regarding the pitfalls that come with investing in the bond market and hence you can take an informed decision.