Dual Currency Bond

Dual currency bonds

Dual currency bonds are debt securities that pay coupon interest in a different denomination than the one in which the bond is issued. For instance, a dual currency bond denominated in U.S. dollars might pay interest in Euros, or vice versa. The exchange rate for currencies may be specified on the bond. There are three basic types of dual currency bonds: traditional dual currency bonds, reverse dual currency bonds, and power reverse dual currency bonds. Each offers certain advantages to investors; both traditional dual currency bonds and reverse dual currency bonds typically specify the exact exchange rate to be used in converting currency from one denomination to another.

Traditional dual currency bonds

The traditional form for a dual currency bond specifies that interest will be paid in the investor’s domestic currency, with the principal amount of the bond denominated in the issuer’s domestic currency. This can be advantageous to both investor and issuer if there is a significant difference in the prevailing interest rates in the two countries.

Reverse dual currency bonds

A variant on the dual currency bond, the reverse dual currency bond pays interest in the issuer’s domestic currency, while the principal amount of the bond is denominated in the currency of the investor. Reverse dual currency bonds are useful in cases where the difference in interest rates allows both investor and issuer to profit relative to a traditional vanilla loan in a single currency.

Power reverse dual currency bonds

Like other dual currency bonds, power reverse dual currency bonds pay coupon interest in a different currency than the denomination of the principal. These structured products add an additional element of risk, since there is the potential for shifts in the relative values of the two currencies that can be advantageous or detrimental. Some power reverse dual currency bonds feature digital caps that lock the rate at a certain threshold, while others feature knockouts or other provisions that allow the seller to cancel the transaction.