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Foreign Government Bonds
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)
      

Bonds which are a direct obligation of a foreign government.  These bonds are of two classes:  (1) external bonds, those marketed and intended for investment by investors in another country and payable as to both principal and interest in the currency of that country, and (2) INTERNAL BONDS, those marketed primarily in the country of issue and payable in the currency of that country.  The external bonds of foreign countries which have been marketed in the United States are also known as dollar bonds.  A few foreign government issues are payable in several currencies and are known as MULTIPLE CURRENCY BONDS.  In addition to foreign (national) government bonds, many foreign municipal issues have been floated in the U.S. market.  See EXTERNAL BOND

As to security, foreign government bonds may be divided into two classes:  (1) promises to pay or certificates of indebtedness without collateral, and (2) those secured by pledge of specific assets.  Most issues are of the former type.  The latter type was exemplified by the old borrowings, such as the secured debt of Mexico (examples, the Conds. 5s, 1899, and Gold 4s, 1910), secured by specific revenues.

As investments, the value of these bonds depends upon the same factors as the value of U.S. bonds, i.e., upon the good faith, honor, political stability, degree of industrial advancement, and commercial ability of the issuing government.  Motivations for interest by U.S. investors in foreign government bonds include (1) higher income (ordinarily), 
(2) capital gains in foreign government bonds from depressed discount levels as market prices reflect economic recovery of the countries concerned in recent years, 
(3) diversification.  Extra risk in investing in such issues, however, may include such factors as (1) exchange restrictions, (2) currency instability, (3) governmental instability, and (4) risk of repudiation with change in administrations or governments.

The record of foreign government bonds sold in the United States in modern times is not an enviable one.  In the world collapse of 1929 - 1933, bonds were defaulted by a number of South American countries, and subsequently World War II conditions compelled default on European issues of various nations.  As the result of debt adjustment plans and validation arrangements, many of these countries resumed service on their dollar debt with adjusted interest and/or sinking fund payments and extended maturities. (See FOREIGN BONDHOLDERS' PROTECTIVE COUNCIL, INC.)

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