Uridashi bonds
Encyclopedia
An Uridashi bond is a bond
denominated in a foreign currency
and sold directly to Japanese household investors. An Uridashi bond is normally issued in high-yielding currencies such as New Zealand Dollars
or Australian Dollars
in order to give the investor a higher return than the historically low domestic interest rate
in Japan.
Provided that the interest rate differential between the foreign and local currency is maintained, the investor will receive higher interest rate payments than if he/she had invested in a Japanese Yen
- denominated bond
. In addition to the credit risk
on the bond issuer, the investor also takes on currency risk
since the foreign currency denominated coupon payments will have to be exchanged into Japanese Yen for the retail investor or if the investor should wish to sell the bond and exchange the proceeds from the sale back into Japanese Yen.
Uridashi bonds became very popular in the 2000s and are often associated with the carry trade in which a loan is made in a low interest currency to buy instruments in a higher yield currency. During the 2008 financial crisis the carry trade and foreign currency bonds in general came under criticism in Japan for contributing to the crisis.
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
denominated in a foreign currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
and sold directly to Japanese household investors. An Uridashi bond is normally issued in high-yielding currencies such as New Zealand Dollars
New Zealand dollar
The New Zealand dollar is the currency of New Zealand. It also circulates in the Cook Islands , Niue, Tokelau, and the Pitcairn Islands. It is divided into 100 cents....
or Australian Dollars
Australian dollar
The Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu...
in order to give the investor a higher return than the historically low domestic interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
in Japan.
Provided that the interest rate differential between the foreign and local currency is maintained, the investor will receive higher interest rate payments than if he/she had invested in a Japanese Yen
Japanese yen
The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
- denominated bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
. In addition to the credit risk
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
on the bond issuer, the investor also takes on currency risk
Currency risk
Currency risk or exchange rate risk is a form of financial risk that arises from the potential change in the exchange rate of one currency in relation to another...
since the foreign currency denominated coupon payments will have to be exchanged into Japanese Yen for the retail investor or if the investor should wish to sell the bond and exchange the proceeds from the sale back into Japanese Yen.
Uridashi bonds became very popular in the 2000s and are often associated with the carry trade in which a loan is made in a low interest currency to buy instruments in a higher yield currency. During the 2008 financial crisis the carry trade and foreign currency bonds in general came under criticism in Japan for contributing to the crisis.