Investing in foreign bonds.

Many investors, at one point or another, consider investing in foreign currencies. If this is something you're thinking about doing soon, there are a few things you should keep in mind before you invest in foreign currencies or bonds.

As a general rule, there are three main characteristics that must be present in order for a bond to be considered foreign and are as follows:

- The bond is issued by a foreign body, such as a government, corporation, or municipality.
- The bond is denominated in a foreign currency.
- The currencies are traded on a foreign financial market.

There are two main types of foreign bonds:
- Bonds from developed nations. Bonds that are issued in developed countries such as Canada, Europe, Japan, and other countries where financial markets are relatively efficient and pose a lower risk. These bond yields are similar to yields in the US.
- Bonds from emerging markets. The developing world, including countries such as Jamaica or Jordan, can also issue bonds. However, the majority of emerging markets bonds are issued from Argentina, Brazil, and Mexico. The yields here tend to be much higher because investors run a myriad of risks that are not present in developed countries, such as currency collapse to a government overthrow.

Both emerging bonds and bonds from developed nations come from one of the following:
- Government bonds. These bonds are backed by the country's issuing governments and their agencies. The agencies are often hesitant to default because once lenders have lost their money or been burned. they refuse to provide more funds.
- Corporate bonds. These are bonds issues by major foreign companies, similar to AT&T and the like in the US.

Risks
Foreign bonds and currencies carry certain risks with them that aren't present with stocks and currencies traded within the United States. Any form of foreign currency is subject to currency risk, or the risk for loss as a result of fluctuations in the market or exchange rates against your own currency.

There are two types of currencies: currencies pegged to the US dollar and currencies that are free-floating. Pegged currency values are those that move in line with the US dollar and protect it from currency risk. The value of free-floating currencies, however, fluctuates completely independently from the US dollar, posing a greater risk.

Currency risk is the risk of loss of value in an investment because the currency in which the investment is denominated depreciates against your home currency. Currency risk results from fluctuating worldwide exchange rates, inflation, and interest rates. If you invest in foreign stocks, or in a U.S.-based mutual fund company that invests in overseas companies, you face a certain level of currency risk.

Choosing your bonds
While there are definitely risks involved, investing in foreign bonds can also yield high returns if you know how to invest wisely. Tax advantages, the potential for a high return, protection of assets, and diversifying your portfolio are just a few of the reasons people choose to invest in foreign bonds and currencies.

It's important-particularly if you've never invested in foreign bonds or currencies-that you consult with your investment advisor or broker before you risk putting a great deal of money into a volatile bond. In addition, you will also want to research the market thoroughly.