Brady Bonds

Brady bonds definition

Named after former U.S. Secretary of the Treasury Nicholas Brady, the Brady bond was specifically designed for issue by Latin American countries to assist them in paying off a portion of their outstanding debt to the United States. First issued in the 1980s, Brady bonds were an innovative way of managing international debt and provided a way for creditor banks to ensure a return on at least a portion of their investment by converting existing debts into more secure, U.S. Treasury-backed Brady bonds instead. While most Brady bonds are 30-year zero-coupon securities backed by the U.S. Treasury, the Brady bonds definition encompasses a number of different types of securities used in the course of implementing the Brady Plan.

Brady bonds structuring

At their inception, Brady bonds were intended to provide relief, both for creditors of Central and South American countries and for the countries themselves. The Brady Plan was initiated in order to allow the conversion of existing debt owed by Latin American countries into more stable U.S.-backed treasury bonds, ensuring a certain level of return on investment for creditors and relieving some of the pressure of overwhelming debt from these developing areas. Brady bonds were designed to cover the principal amount owed to a creditor and to bring the loan status out of default.

While in some cases the interest owed was also included, generally the amount converted was roughly the principal amount originally lent. Creditors accepted the Brady bonds as payment because they represented a more secure investment and guaranteed payment of the face amount, in contrast to the uncertain futures of bonds backed by the original debtor countries. It was often deemed preferable to accept a smaller portion of the amount owed and be certain of receiving that amount than to risk losing all of the investment if the country in question failed to honor its existing financial commitments due to financial difficulties.

Types of Brady bonds

Two basic categories of Brady bonds have been issued, with variations on each type.
  • Par bonds have a face value equal to the actual amount owed, but the coupon rate is below the current market rate at the time the Brady bond is issued.
  • Discount bonds feature a face value below the current amount owed, but the coupon is set at the current market rate at the time of issuance.
In both cases, Brady bonds are backed by the U.S. Treasury and represent a more secure investment than the original bonds.
Tim Ord
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Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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