Explore how dual-currency and multicurrency bond structures offer coupon payments and principal in multiple currencies, the associated risks, hedging techniques, and practical examples for advanced fixed-income portfolio management.
Sometimes, you get a call from a colleague who says, “Hey, guess what? We just issued a bond with coupons in euros but principal repayment in US dollars!” And you might think, “Um, are you sure that’s not complicated?” Dual-currency and multicurrency bonds can indeed look a bit wild at first glance, but trust me, they’re not quite the monsters they might seem. They simply allow issuers to raise capital in one currency while paying interest in another, or possibly switching among multiple currencies over the life of a bond. As we dig in, we’ll see how these structures can help meet strategic financing goals, hedge currency exposures, or exploit relative exchange rate movements.
Even though we’re focusing on advanced bond structures, I’d like to keep the conversation a bit relaxed. We’ll talk about the fundamentals—what these bonds are, who issues them, why they matter, how they work, and what you should watch out for as a portfolio manager or analyst. Let’s jump right in.
Dual-currency bonds are straightforward in concept but can feel a bit intricate in detail. Essentially, the coupon payments are made in one currency (often a stable currency) whereas the principal (the redemption amount) is paid in a different currency.
Picture a multinational corporation headquartered in the United States with significant operations in Japan. Perhaps it wants to raise capital to fund its expansion in Japan but wants to keep the coupon payments attractive to a global investor base that prefers receiving payments in USD. By issuing a dual-currency bond, that corporation might pay semiannual coupons in USD (appealing to US-based investors) but repay the principal in JPY at maturity (which might align with the company’s future yen cash inflows). This structure can be a neat solution to manage future currency liabilities.
Below is a simple Mermaid diagram to show the payment flows. It’s short and sweet, but hopefully helps illustrate the concept:
flowchart LR
A["Issuer (Pays Coupon in Currency A)"] -->|Coupon Payment| B["Investor"]
B["Investor"] -->|Principal Repayment in Currency B| A["Issuer"]
Throughout the bond’s life:
• Coupons in Currency A (say USD)
• Principal redemption in Currency B (say JPY)
• Fixed or Floating Rate Coupons: The coupon rate could be fixed or pegged to an index in the coupon currency.
• Maturity: Often medium to long term, allowing the issuer to manage long-term currency obligations.
• Possible Call or Put Features: Some dual-currency issues include embedded options, which can further complicate valuations.
From a valuation perspective, analyzing a dual-currency bond is akin to treating it like two separate cash flow streams:
This structure is obviously sensitive to FX risk: if the currency in which the principal is repaid depreciates relative to the coupon currency (from an investor’s perspective), returns could be lower. Conversely, if the redemption currency appreciates, investors benefit. The markets for these instruments sometimes trade at a premium or discount relative to “plain vanilla” bonds, reflecting those embedded foreign exchange expectations.
Sometimes, one or two currencies aren’t enough. That’s where multicurrency bonds step in. These bonds provide the issuer the flexibility (or the obligation, depending on the structure) to switch coupon and/or principal payments among multiple currencies over the life of the bond.
Imagine a supranational institution—say a development bank—funding projects around the globe. It may want to pay coupons in euros for part of the bond’s life, switch to US dollars later, or perhaps offer redemption in British pounds. By making it a multicurrency bond, the issuer can tap multiple pools of global investors and align parts of the bond’s cash flows to the currency funding needs of different projects.
Multicurrency bonds can get fancy. Some structures include embedded options that let the holder or issuer decide at certain points to change the currency in which future coupon payments or the final principal redemption will be made. When investors hold such a bond, they essentially hold a bond-plus-derivative combo, where the derivative might be an FX option allowing them to switch from one currency to another at a predetermined exchange rate.
• Currency Conversion Options: Could be at the investor’s discretion (investor-choose) or at the issuer’s discretion (issuer-choose), or both.
• Caps/Floors on Exchange Rates: Some structures place upper or lower bounds on the exchange rate used if the currency option is exercised.
From the vantage point of a portfolio manager, these are not trivial to analyze. You’ll want to break down the future possible paths of currency conversion, model out how each path affects your total return, and weigh that against the bond’s cost. Since these instruments are less common, secondary market liquidity can be patchy, which is something to keep in mind if you’re planning to exit your position before maturity.
FX risk is “the big one” for both dual-currency and multicurrency bonds. If the currency in which you receive your cash flow weakens relative to your home currency, your effective yield shrinks. If you’re an issuer, the opposite might happen: it might actually become cheaper to repay principal if your company’s home currency appreciates (or your liability currency depreciates).
At times, issuers and investors hedge this exposure using cross-currency swaps or FX forwards. Cross-currency swaps allow you to effectively exchange a series of payments in one currency for a series of payments in another currency. FX forwards lock in an exchange rate for a future settlement.
Dual-currency and multicurrency instruments can be considered niche products. While that sometimes means higher yields or attractive terms, it can also mean fewer market participants. Lower liquidity can lead to higher bid-ask spreads and more difficulty buying or selling large positions without impacting prices.
These bonds still have the issuer’s default risk to consider. In addition, paying interest or principal in multiple currencies might expose the issuer to the risk that they’ll be unable to obtain sufficient foreign currency when a payment date comes due (especially in times of market stress or due to capital controls). Analysts must keep an eye on capital controls—those government measures that restrict cross-border flows of currency. If an issuer runs into constraints obtaining foreign currency, that could lead to missed coupon or principal payments.
Under IFRS or US GAAP, certain currency features embedded in bonds may trigger requirements to separately account for derivatives. If the currency conversion feature (an embedded derivative) is not closely related to the bond’s host contract, the issuer (or investor, depending on the perspective) may have to bifurcate and recognize the derivative at fair value on the balance sheet, while accounting for the bond’s host separately.
In all honesty, the complexity can be an accounting headache, but from a portfolio management standpoint, you also want to verify how those potential derivative exposures will be reported on financial statements—particularly if you’re analyzing an issuer’s financial health.
• Access to Broader Investor Base: By denominating coupons in a stable or popular currency (e.g., USD), issuers may attract more global capital.
• Matching Currency Liabilities: Issuers who ultimately need a different currency for principal payback can mitigate (though not eliminate) exchange rate risk.
• Lower Costs: In certain market conditions, dual-currency or multicurrency bonds can be cheaper than standard single-currency bonds, especially if the issuer is confident about future FX trends.
Suppose GlobalFoods Inc., a fictional multinational, issues a 5-year bond with a face value of ¥10 billion. Today, that’s worth approximately $80 million if the exchange rate is ¥125 = $1. They promise 3% annual coupons in USD (paid semiannually) on a notional of $80 million. So each coupon is $80 million × 3% ÷ 2 = $1.2 million per payment.
At maturity, investors receive ¥10 billion. If the USD/JPY spot rate at maturity remains at 125, that redemption is still $80 million. But if JPY depreciates to 130, the redemption is worth only around $77 million for a USD-based investor, implying a currency loss. If JPY appreciates to 120, the redemption becomes $83.3 million. Returning to a fundamental analysis perspective, you’d discount those possible redemption values back to present at the rate that reflects not only time value but also the FX risk premium.
In practice, the issuer might simultaneously enter a cross-currency swap to exchange its yen principal into dollars (if needed for domestic operations) and pay the swap counterparty yen. This effectively transforms the bond’s obligations from the issuer’s perspective into a single-currency set of cash flows. Investors might similarly use cross-currency swaps to tweak the currency exposure.
Investors or issuers can lock in the exchange rate for the bond’s principal redemption or coupon amounts. This ensures a known cost (or yield) in the investor’s or issuer’s home currency. A forward contract can be structured to settle when each coupon payment or principal redemption is due.
Some issuers “naturally hedge” by matching bond payments in foreign currency with revenues in that same currency. For instance, if you’re a big automotive company that sells in Europe and you issue coupons in euros, your euro revenues might be enough to pay those coupon obligations without needing new currency conversions each period.
• Overlooking Capital Controls: Just because an issuer has plenty of local currency doesn’t guarantee free convertibility. Global bond managers must consider the possibility of government-imposed restrictions on capital flows.
• Underestimating Liquidity Risk: A bond that trades in multiple currencies can sometimes be illiquid. Be prepared for wider spreads if you need to unwind your position quickly.
• Not Properly Valuing Embedded Options: If there’s a currency conversion or exchange-rate cap/floor embedded, you need to carefully separate out that derivative’s value.
• Over-Reliance on One Currency Outlook: We’ve probably all been guilty of “overconfidence” in forecasting exchange rates. Remember that currency markets can shift rapidly and unpredictably.
Dual-currency and multicurrency bonds can help portfolio managers achieve currency diversification and sometimes capture higher yields. They can be particularly handy in a liability-driven investing (LDI) context if liabilities are denominated in different currencies.
Because these bonds may trade at yields higher than comparable single-currency bonds (due to added complexity and risk), some managers view them as spread pick-up opportunities. In that sense, they can be integrated into relative value strategies involving cross-currency basis swaps or similar derivative overlays.
In advanced fixed-income attribution models, you’d parse out the portion of return attributable to:
• Market-related yield changes
• Spread compression or expansion
• Currency fluctuations (relative to your base currency)
• Potential gains/losses on embedded currency conversion features
I recall a market participant who once purchased dual-currency bonds paying sterling coupons but offering redemption in Swiss francs. The idea was that the investor planned to move to Switzerland eventually, so they were “forced savers” in Swiss francs by the time the bond matured. The investor ended up quite happy since the Swiss franc appreciated, but that was partly luck of the markets. It’s a small example of how personal or corporate strategies might influence these bond decisions.
On the CFA® Level III exam, dual-currency and multicurrency bonds often appear in scenarios requiring you to integrate currency risk considerations with fixed-income portfolio management. You could see an item set or an essay question that requires you to:
• Value the separate components of the bond’s cash flows in different currencies.
• Discuss or recommend hedging strategies via cross-currency swaps or forwards.
• Evaluate the advantages/disadvantages to an issuer or investor.
• Identify how capital controls or regulatory frameworks might impact payment.
Time management is crucial if you get an essay question dissecting these complexities. Always break down the currency exposures systematically—don’t skip steps, and clearly outline discount rates and exchange rate assumptions.
• Hull, J. (2018). Options, Futures, and Other Derivatives (10th ed.). Pearson.
• Baker, H. K. & English, P. (2011). “Foreign Exchange Exposure Indicators.” Financial Management Journal.
• Bank for International Settlements (BIS). (n.d.). Cross-Currency Markets. Available at: https://www.bis.org/
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