What are the  Risks Involved in Buying International Bonds?

If we go according to the famous quote" Don't put all your eggs in single basket" then why invest only in your home country or home currency. One can diversify their investment by investing in international market through the equity and bond markets there. Many investors wish to consider this option as it may save them if there is any political turmoil in one's own country.

This gives investors an option to look at international bonds. Let's begin by first understanding more on the characteristics of these bonds.

1) The bond is issued by a foreign entity (It can be government, municipality or corporation).
2) The bond will be traded in a foreign financial market.
3) The bond will be denominated in foreign currency.

However, investing in international bonds can be risky ride as it depends on various factor and laws which are to be considered.

Here are three main risks involved.

Credit Risk

Credit risk is the risk when the borrower defaults his payment. It also depends on the economy of the country you are planning to invest. One should understand the growth prospects and how the economy is expected to behave in the coming years.

Currency Risk

Once you hold the investment in another currency, the risk that arises from fluctuations in the price of one currency relative to home currency will impact your investment. For example, a U.S. investor holding Indian bonds could lose money if the Rupee loses value relative to the U.S. dollar even if the coupon payments are paid on time.

This plays a vital role in the international investments as it can literally make a profit on an investment or turn it into a loss or visa versa.

Inflation Risk

Risk that arises from the uncertainty over the growth of the economy which will affect the future real value.
Any news across borders such as GDP, political tension can impact the investment.

Most of international bonds are issued by government of the country in order to raise funds to cover short-term deficits. Before, investing one should think holistically, and re-balance their portfolio periodically.

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