Dragon Bond

What Is a Dragon Bond?

A dragon bond is a long-term debt security issued by firms operating in Asian nations (excluding Japan), yet designated in foreign, stable currencies, like the U.S. dollar (USD) or the Japanese yen (JPY).

Understanding Dragon Bonds

A dragon bond is a fixed-income security designated in currencies considered more stable than the home currency; it is viewed as more attractive to foreign investors thus. The reasoning for organizing them to be however engaging as conceivable to investors outside of Asia seems to be on the grounds that they relieve the foreign exchange risk that can impact returns as currency values change. Dragon bonds are like eurobonds in that they are designated in foreign currencies that are liquid and stable, however in the Asian context rather than Europe.

Dragon bonds were first presented in 1991 by the Asian Development Bank (ADB). Due to the foreign denomination, these can be more complex than different bonds in light of international differences in taxation, regulatory compliance issues facing firms that issue them, plus limited liquidity in trading them in secondary markets.

Dragon Bonds and Currency Risk

Dragon bonds were made to widen the market for fixed-income securities in Asia and foster more active Asian financial markets. Albeit Asian companies had issued bonds in neighborhood currencies, they pursued for the most part to domestic investors restricting access to capital. Foreign investors were frequently hesitant to buy bonds overwhelmed in currencies that could vacillate quickly. Currencies like the U.S. dollar and Japanese yen were viewed as stable enough for accumulating assets.

For example, an Indonesian company could issue a 20-year bond named in Indonesian rupiah (IDR), with a coupon rate of 4-percent paid yearly. If the U.S. dollar-Indonesian rupiah (USD/IDR) were 10,000 rupiahs for each one U.S. dollar, then, at that point, a 100-million rupiah bond would be the equivalent of $10,000. Each interest payment of 4 million rupiah would address $400 at the time the bond is issued.

To an Indonesian investor, an investment of 100 million rupiah would pay 4 million rupiah each year with return of principal following 20 years. Yet, for an investor buying such a bond with U.S. dollars, an unfavorable movement between the relative value of the two currencies could make extra risk.

In the event that in the next year the exchange rate moved from 10,000 IDR/1 USD to 11,000 IDR/1 USD, then, at that point, the principal coupon payment of 4 million rupiah would just be worth just about $364 rather than $400 as anticipated when the bond was first issued. The bond's 100-million rupiah face value would be worth about $9,091. What's more, assuming the common interest rate climbs, the value of the bond would be even lower.

In any case, a dragon bond named in USD, while still subject to interest rate risk, wouldn't be subject to currency risk. The regional economy has changed fundamentally in the years starting from the presentation of dragon bonds in 1991, including the 1997 Asian financial crisis, and the growth of the Chinese economy. Nonetheless, dragon bonds keep on assisting Asian markets with drawing in more foreign investment.

Features

• Dragon bonds, presented by the Asian Development Bank (ADB) in 1991, are similar to eurobonds issued by European corporations in foreign currencies.
• Dragon bonds are Asian corporate bonds, ex-Japan, yet designated in a foreign currency.
• Dragon bonds are named in currencies considered to be more stable than the home currency to assist with relieving the foreign exchange risk.