Foreign Bonds Essay Example | Topics and Well Written Essays - 1000 words

Foreign Bonds - Essay Example Foreign Bonds Introduction to Foreign Bonds â€Å"Foreign bonds are a debt security issued by a borrower from outside the country in whose currency the bond is denominated and in which the bond is sold† (Scott 2003). Whatever country the bonds come from, they fall into either of two classes: government bonds and corporate bonds (Brigham & Eharhardt 2009). The former is supported by the issuing governments and their agencies. For example, a bond denominated in Philippine peso that is issued by the government of the United Sates is a foreign bond. Bonds that are partially backed by the U.S. government are called â€Å"Brady bonds† after Nicholas Brady, former treasury secretary under the administration of presidents Reagan and Bush (Brigham & Ehrhardt 2009). Corporate bonds, on the other are issued by foreign or multinational corporations (MNCs) (Madura 2006). For instance, Sharp Corporation (a Japanese firm) may need U.S. dollars to finance the operations of its holdings in the United States. If it decides to raise the needed capital in the United States, then the bond would be financed by a group of U.S. investment bankers, denominated in U.S. dollars, and sold to U.S. investors in accordance with SEC and applicable state regulations. The bond is no different from those issued by equivalent U.S. corporations except for its foreign origin, thus making it a foreign bond. Alternatively, if Sharp Corporation issued bonds in the Philippines that were denominated in pesos then they would also be considered as foreign bonds. â€Å"Foreign bond issues carry prefixes that indicate the country in which the offering is made† (Shailaja 2008). If Sharp Corporation would make a U.S. dollar denominated bond issue in the U.S. capital market, it is making an issue of Yankee bonds. Similarly a Samurai bond is a yen denominated bond issue made by a foreign borrower in the Japanese capital market to Japanese investors. A Bulldog bond is a pound sterling denomi nated bond issue made by a foreign borrower in the British capital market to British investors. Foreign bonds may be subject to withholding tax. â€Å"This is a tax levied by the country to which the foreign borrower belongs, on interest payments made to foreign bondholders† (Shailaja 2008). Suppose Sharp Corporation makes a Yankee bond issue and the Japanese tax law stipulates that a 15% withholding tax must be levied on interest payments made by Sharp Corporation to the bond holder. If the face value of each bond is $100 and the fixed coupon rate is 10%, the interest receivable by a bondholder is $10. But with the 15% withholding tax, he receives only $8.5—that is, $10 less 15%. The Reason Foreign Bonds Exist â€Å"Foreign bonds are designed to cater to the investment needs of the target market† (Shailaja 2008). They have certain attributes that appeal to investors in the capital market where they are tendered. Foreign firms or multinational corporations that aspire to expand their business portfolios choose to issue bonds in several foreign countries. This is also one strategy to obtain support from the government of each foreign country that they plan to do business with. Issuers understand that they may be able to attract a stronger demand by offering their bonds in a particular foreign country rather than in their home country (Madura 2008). Some countries have a limited investor base, so companies in those countries seek financing overseas (Madura 2008). Also