Financial Management

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Another risk when investing foreign bond is on credit. Foreign government bonds may also be subject to credit risk. The fact show that a government can also go to bankrupt, the example of Greece is a typical example. Moody’s Investors Service and Standard & Poor’s often rate foreign bonds. However, investors should be aware that accounting and reporting standards vary by country, which may make it difficult to ascertain the issuers’ financial strength. Since foreign currency risk is a major consideration, foreign corporations often carry the debt rating that reflects both the credit quality of the company and the country. Note that credit actions by either rating agency, as with any rated bond, may affect the investment. As a rule of thumb, in addition to estimating return on investment, yield calculations reflect the market perception of risk. When a bond yields more than its comparable counterparts, the market perceives it to carry a higher overall risk. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to review, revision, suspension, reduction or withdrawal at any time by the assigning rating agency (James, 2014).

In conclusion, Japanese firms should go investing on foreign bonds because JGBs has lowest domestic interest rates in the world. However, companies may face some risks on currency and on credit. To avoid risks, Japanese firms should invest in some foreign bond, not only a foreign bond.

References:

Hauer, T. (2013). FINANCE: Investing in Foreign Bonds. Colorador Community Media. [online] Available at: http://coloradocommunitymedia.com/stories/FINANCE-Investing-in-Foreign-Bonds,51723 [Accessed 19 Nov. 2014].

James, R. (2014). Raymond James Financial | Services and Products | Taxable Bonds | Foreign Currency Bonds. [online] Raymondjames.com. Available at: http://www.raymondjames.com/fixed_income_foreign_currency_bonds.htm [Accessed 20 Nov. 2014].

Ross, M. (2012). The Basics Of Investing In Foreign Government Bonds. [online] Investopedia. Available at: http://www.investopedia.com/financial-edge/0412/the-basics-of-investing-in-foreign-government-bonds.aspx [Accessed 20 Nov. 2014].

Saoshiro, S. (2014). Bond ladders a hit with Japan investors seeking higher returns. Reuters. [online] Available at: http://www.reuters.com/article/2014/08/05/markets-japan-bonds-idUSL4N0QA2EH20140805 [Accessed 19 Nov. 2014].

Wild, R. (2007). Bond investing for dummies. Hoboken, N.J.: Wiley.