The Characteristics of Domestic Bonds
Original post by Victoria Duff of Demand Media
All bonds are basically the same. They represent loans to the issuer of the bond and have specific qualities that are outlined in the prospectus for each issue. They are similar in that they have stated maturities, stated coupons, interest payment dates and issue dates. They may have call dates or sinking funds, but these are standard across all markets. Bond markets all over the globe trade domestic bonds, foreign bonds and Euro bonds -- all very similar in structure, but different depending on where you are located.
Domestic bonds are bonds issued by a country or corporation in that country, in the currency of the country, for sale and trading within that country. If MegaBrands Canada issues a bond in Canada, denominated in Canadian dollars for trading in the Canadian bond market, it is a domestic Canadian corporate bond. Likewise, if MegaBrands USA issues a bond in the United States, denominated in U.S. dollars for trading in the U.S. bond market, it is a domestic U.S. corporate bond.
Foreign bonds are issued by offshore corporations for trading in a specific country's bond market. They are not denominated in the currency of the issuing corporation, but in the currency of the marketplace where they will be issued and trading. If MegaBrands Canada issues a bond in the United States, it will be denominated in U.S. dollars and trade on the U.S. markets where it will be known as a foreign bond. Although brokers in Canada may trade the bond, it is not a Canadian domestic bond because it is issued in U.S. dollars. If MegaBrands USA issues a bond denominated in U.S. dollars but it is traded by some brokers in Canada, it is still a domestic U.S. bond.
If MegaBrands USA wants to issue Euro bonds, it would go to an international bank or investment bank, which would make the bonds available in different countries in the currency of those countries. If MegaBrands bonds are sold in Great Britain, they would be denominated in British pounds. If they are sold in one of the European Community countries, they would likely be denominated in Euros. If MegaBrands USA bonds are bought by a U.S. investor and traded on a U.S. trading desk, they are traded in the currency of issue and are still considered Euro bonds, trading as Euro bonds even though on a U.S. trading desk.
Domestic bonds all trade in their own markets at yields relative to that country's government bonds, which are benchmarks for those countries' bond markets. In the United States, domestic bonds trade according to market spreads off U.S. Treasury bonds. This means that the bond market will require a 10-year corporate bond rated AA to yield approximately 75 to 80 basis points more than a 10-year Treasury bond. MegaBrands Canada would trade on a spread to Canadian government bonds. Foreign and Euro bonds also trade in U.S. markets at spreads to Treasuries. A Euro bond issued by MegaBrands USA normally would trade slightly higher in yield relative to a MegaBrands USA domestic bond, but if the Euro is valued significantly higher than the U.S. dollar, the price of the bond would adjust for the higher currency value.
- University of Houston, Texas -- Bauer College of Business: International Bond Markets
- Ohio State University; Analysis of the Eurobond Market; Yong Cheol Kim; 1987
- BYU Marriott School of Business: International Bonds
- Bonds Online: US Corporate Spreads
About the Author
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.