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Japanese Bonds Essay

819 words - 4 pages

Executive SummaryWhen it comes to bonds there is a world of opportunity outside U.S issues. Japanese Government Bonds (JGBs) are considered to be of high quality and a very low credit risk according to Moody’s, they are guaranteed by the Japanese government. This is of particular interest in the current worldwide economic situation. While JGBs are considered low risk, U.S investor’s must consider other factors such as foreign exchange risk as JGBs are sold in local currency, regulations and tax issues such as withholding tax. The main advantage of investing in foreign government issues is portfolio diversification as they enable the investor to go beyond US specific events.Foreign ...view middle of the document...

(Moody’s Ratings). Generally, a lower coupon rate implies a greater modified duration and greater price volatility. (Sevic,2009)3. Special FeaturesTax-related Analysis-“Interest income from coupon bearing bonds held by non-resident individuals or foreign corporations is generally subject to 15% withholding tax.” Non-residents will exempt from income tax if they deposit the interest from JGBs with a JGB Book-entry system participant in Japan (i.e. Domestic financial institutions). (www.mof.go.jp/english/bonds/taxation.htm).JGBs are sold in the domestic currency of Japan (Yen, ¥), foreign bonds are a natural hedge on the U.S currency. “A big wild card in sovereign debt investing is currency exposure. The coupons on bonds are often paid in local currencies, and U.S. investors must decide if they want a currency play.” (Levisohn and Kalwarski, 2009). One strategy is to hedge inherent currency risk by using futures contracts or buying positions in foreign exchange markets in order to counteract interest rate swings that impact currency values. (Sevic, 2009). Default risk should also be considered but is of more concern in less industrialized nations.4. DurationDuration is associated with the slope of the price-yield curve. (See Appendix [D2]). Since the bond term is 10 years its price sensitivity is greater to changes in yield than a...

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