Investing in dual currency bonds

Question

What an investor should consider before investing in dual currency bonds?

Answer 1

From the investor’s perspective, a dual currency bond involves a long-term forward contract.  In case the second currency appreciates over life of the bond, principal repayment will be worth more than the return of principal in issuing the currency if the payoff currency decreases, the investor will suffer from the loss of an exchange rate.  Dual currency bonds are attractive to MNCs seeking financing in order to establish or expand operations in the country issuing the payoff currency.  During the early years, the coupon payments can be made by the parent firm in the issuing currency.  At maturity, the MNC anticipates the principal to be repaid from profits earned by the subsidiary.  The MNC may suffer an exchange rate loss if the subsidiary is unable to repay the principal and the payoff currency has appreciated relative to the issuing currency.  Consequently, both the borrower and the investor are exposed to exchange rate uncertainty from a dual currency bond.