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Dual currency bond is a debt instrument offering a distinctive approach to overseas investments. In essence, these bonds have a dual nature: coupon payments are made in a currency other than a currency of the bond face value denomination (base currency). The amount of interest to be paid is decided by converting the due amount in the base currency into the payment currency based on a relevant exchange rate.
The dual feature introduces an element of flexibility, catering to both issuers and investors who seek a balance between their currency preferences. For instance, a dual currency bond might be issued in U.S. Dollars (USD), with interest payments made in Japanese Yen (JPY), creating a fusion of two different monetary realms.
Traditional Dual Currency Bonds. In this type, interest payments are made in the investors domestic currency, while the principal amount is denominated in the issuers domestic currency.
Reverse Dual Currency Bonds. Conversely, in reverse dual currency bonds, interest payments are made in the issuers domestic currency, and the principal amount is denominated in the investors domestic currency.
Benefits
Diversification. Issuers can diversify their investor base by tapping into multiple markets. Besides, if their domestic currency is relatively weak, dual currency bonds provide an opportunity to borrow in hard currencies while shifting major currency risks to the bond holders. Investors, on their part, can use such instruments to diversify their currency portfolio.
Attracting Investors. These bonds can attract a broader range of investors, including those who prefer returns in specific foreign currencies but prefer not to enter the overseas bond markets directly.
Currency Matching. Issuers can align debt obligations with specific currency revenue streams, reducing currency risk and exposure.
Higher Coupon Rates. Dual currency bonds often offer higher coupon rates than standard bonds, potentially providing investors with increased income.
Risks
Foreign Exchange Risk. Fluctuations in exchange rates between the base currency and the coupon currency can impact the value of coupon payments and the principal amount upon maturity.
Complexity. Dual currency bonds are more intricate than standard bonds, requiring investors to have a deeper understanding of currency dynamics and potential risks.
Liquidity Concerns. These bonds may have lower liquidity than major currency bonds, making them less suitable for certain investors seeking easy tradability.
Masala Bonds. Denominated in Indian Rupees with coupon and redemption proceeds usually paid in the US dollar, Euro, or Japanese Yen.
Foreign Interest Payment Security (FIPS). Specific to the Swiss capital market, FIPS bonds have coupon payments in foreign currency while the principal is repaid in Swiss frank.
Multiple Currency Clause Bond. Provides investors the right to select a currency from a pre-approved list for principal and sometimes coupon payments.
Special Drawing Rights (SDR) Bonds. Denominated in the IMFs composite currency based on a basket of major currencies, but traded exclusively in US dollars.
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