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Glossary

Formosa bond

Category — Bond Types
A Formosa bond is a bond which is issued in Taiwan, but it is denominated in a currency other than the Taiwan dollar. Formosa bonds can be issued by subsidiaries of foreign companies which either already operate in Taiwan or which are set up for the purpose. In order to qualify as Formosa bond issuers, borrowers must have credit ratings of BBB or higher. Formosa bonds are listed and traded on the Taipei Exchange. Investment grade 30-year zero-coupon accrediting callable bonds, the most common Formosa bond structure, typically have accretion yields north of 4% today, compared to 2.65% for equivalent U.S. Treasury zero-coupon bonds. The higher yields on Formosa bonds should compensate the investor for both higher credit risk and call risk; however, a diversified investment grade bond portfolio without embedded calls often has a comparable yield to callable Formosa bonds. Thus, Formosa bonds significantly undervalue the call option, which can be worth as much as the credit component.
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