Investing in Foreign Bonds

Investing in bonds can be a good way to diversify from an all-stock portfolio. Bonds present investors with a regular interest payment and then pay them back their initial investment at the end of the term. Many investors have even taken to investing in foreign bonds because of the opportunities that they present. Here are the basics of foreign bonds and how they work as investment tools.

How Foreign Bonds Work

When a foreign company or government needs to raise money, it can issue bonds. It issues these bonds to investors at a certain price. In return for their investment, the investors get a regular interest payment. Then they cash in the bonds at the end of the term and get their money back. 

How to Invest in Foreign Bonds

Investing in foreign bonds when they are initially offered is very difficult. You usually have to know someone at the bank to do this. For this reason, most people get involved with foreign bonds in the secondary market. There, you can buy the bonds from the investors who purchased them when they were initially available. 

To do this, you will need to get involved with a bond broker or deal with an investment firm. They have access to foreign bonds and sometimes have them in their inventory of assets. Many of the best foreign bonds go quickly, though, so you may have to act fast when they become available. 

Risks 

While investing in foreign bonds can present you with a steady rate of return, there are some risks involved. First of all, there is the currency risk. If you invest in a foreign bond with a foreign currency, there is a chance that your return will not be worth as much as you thought. Exchange rates will vary from the time that you make your investment, and sometimes the change will not be in your favor.

Another big risk that you have to worry about is if the company that issues the bonds goes bankrupt. Normally, if this happens in a domestic situation, you can make a claim to get your initial investment back as a creditor. Many times, you will actually be successful. When investing in foreign bonds, you will have no such luck. 

Since you are a citizen of another country from where the bond is issued, you do not have the same rights as someone who lives in that country. Therefore, if you make a claim to get your initial investment back, that claim will be unenforceable. You could stand to lose your entire investment. 

Investment Strategy

If you choose to invest in foreign bonds, you should do so as part of a larger, diversified portfolio because such an investment is a higher risk than many investors like to take.

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