International Bonds vs Domestic Bonds

When you compare international bonds and domestic bonds, you will find there are several differences that will be important to you as an investor. Both types of bonds could be an appropriate investment for you, depending on the situation. However, there are some risks associated with them as well. Here are the basics of international and domestic bonds.

Domestic Bonds

A domestic bond is a debt instrument that is used for investment in a corporation or the Federal Treasury. When a company decides that they need to raise capital, issuing bonds is one of the ways in which they can do so. Bonds are usually offered in increments of $1000 on the corporate market. Therefore, you would pay them $1000 for a bond and they will agree to pay you a certain amount of money in interest. Each period that is agreed upon, you will receive your interest payment from the company. Then at the end of the bond term, you can take the bond certificate and cash it in to retrieve your initial investment. This means that you will get the $1000 back and the interest that was agreed upon over the life of the bond. 

The other main type of bonds available in the United States are Treasury Bonds. This is the same type of principal that is involved in corporate bonds except you are investing in the United States government. Most savings bonds are purchased at half of the face value. Then after a certain period of time, the value of the bond doubles and you can cash them in for the face value. 

Another type of Treasure Bond is the Government I Bond. This type of bond tracks inflation in the United States and pays you an interest rate equivalent with it. This allows you to keep up with inflation no matter how high it gets. 

The main risk associated with domestic bonds is the risk of bankruptcy. You want the company that you lend money to to stay in business so that they can keep paying your interest. However, even if they do file bankruptcy, you do have a claim to get your money back as you are a creditor. 

International Bonds

International bonds work in the same way, except you choose an international corporation to invest in. They agree to pay you a certain amount of money in interest. Then you cash in the bond at the end to get your initial investment back.

Although it works the same way, international bonds have a greater risk involved. For one thing, you have to worry about currency risk. If the value of the foreign currency goes down, your investment could be negatively affected. 

In addition to currency risk, you have no legal claim to get your money back if the business goes bankrupt. Since you are not a citizen of the country in which they do business, your claim is unenforceable. This considerably adds to the risk associated with the bond when compared to domestic bonds. 

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