The Corner for Jan. 24, 2014

Bonds sold in one country but denominated in the currency of another country are called “Eurobonds.” This designation is not restricted to bonds issued by European countries; rather it reflects that fact that these bonds first appeared in Europe, and they are still more common there than elsewhere. In short, a Eurobond is a bond that is denominated in a currency that local to the entity that issues the bond — its home country currency.

These bonds, like all bonds are subject to the risk of the interest rate market as well as the financial condition of the entity. Additionally, investors purchasing such bonds must take into account the extra risk associated with being paid in the currency of a foreign country, which might fluctuate with respect to his or her own currency (for U.S. investors, with respect to the U.S. dollar). When investing in Eurobonds you are exposed to “exchange rate risk.” Exchange rates can move very fast in the market which can change the total return on Eurobonds positive or negative. Therefore, analyzing and assessing the risk of these bonds is much more difficult than domestic bonds denominated in U.S. dollars.

Eurobonds are not registered in the U.S., but may be traded here after they are issued on the secondary markets. These bonds are of use to countries, international agencies and multinational corporations with a need to borrow dollars. As a side note, a dollar-denominated bond issued in the United States by a foreign entity is called a Yankee bond.

Finally, the characteristics of Eurobonds vary, but they usually pay interest annually. They can have fixed or floating (variable) rates, can be convertible and can be zero-coupon (bonds which are issued at a discount, mature at face value and pays no interest).

Quote of the week: “Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity.” — George Patton

Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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