Explanation of Brady Bonds

Brady Bonds are issued by emerging nations, primarily Latin American, to entice income from international investors. They received their name from U.S. Treasury Secretary Nicholas Brady. The bonds were created in 1989 as a form of reimbursing investors who were holding bonds issued in the early 80s from countries that had gone bankrupt. The bonds were issued in a dollar amount equal to the original par value at least, and they often included unpaid interest. This program was designed to inspire courage in foreign markets that had failed to deliver on previous interests.

Types of Brady Bonds

There were two primary types of Brady Bonds issued in the the 1980s and 1990s. Par bonds were exchanged evenly for the original value of the bond. The coupon rate, however, was discounted below market price. Though the rate was low, both principal and interest were guaranteed. Discount bonds, by contrast, were issued in an amount smaller than the initial par value. The coupon rate was higher, at market rate, and both principal and interest were guaranteed. 

Brady Bonds Today

In 1999, Ecuador became the first country to default on its Brady Bonds, thus again depressing confidence in the emerging market bond system. Following this default and other struggles, many countries began retiring their Brady Bond systems. Mexico, Brazil, Venezuela, Columbia and the Philippines all retired their systems, some by calling back the bonds and others by defaulting. Today, it is not possible to purchase Brady Bonds from many nations who once issued the instruments. However, just because the bonds are no longer called by the same name does not mean there are not remnants of the Brady Bond system in current emerging markets.

Lasting Effect of Brady Bonds

Emerging nations still issue bonds to the international market in order to raise money for local infrastructure development in similar models and in large numbers. Many elements of Brady Bonds have lasted well beyond their name. For example, the par and discount models are still used in many Treasury bonds. Brady Bonds were also innovative in using "structured note" models. This means options were embedded in the bonds; today, embedded options still exist. In fact, even domestic bonds may use embedded options to allow bonds to behave like more complicated and riskier derivative-based securities contracts.  

Market Indicators

Today, analysts use figures estimating the number and amount of emerging market bonds to determine the general confidence in emerging nations. Bonds are the most liquid form of emerging market securities, easily bought and sold within a short period. Therefore, they can rise and fall very quickly when compared to other emerging market funds. In particular, price movements on new iterations of Brady Bonds indicate the market sentiment toward Latin America as a whole. Latin America is still the primary issuer of Brady Bond-like instruments on the market today. 

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