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A sovereign bond is a 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 and/or to repay the principal at a later date, termed Maturity ....
 issued by a national government
Government

Government is the body within any organization that has the authority to make and the power to enforce laws, regulations, or rules. Typically, the government refers to a civil government -- local, provincial, or national -- but commercial, academic, religious, or other formal organizations are also administered by governing bodies....
. Bonds issued by national governments in the country's own currency are also referred to as government bond
Government bond

A government bond is a Bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds....
s.

Nation
Nation

A nation is a cultural and social community. In as much as most members never meet each other, yet feel a common bond, it may be considered an imagined community....
s with very high or unpredictable inflation
Inflation

In economics, inflation is a rise in the general price level of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply ; however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflatio...
 or with unstable exchange rate
Exchange rate

In finance, the exchange rates between two currency specifies how much one currency is worth in terms of the other. It is the value of a foreign nation?s currency in terms of the home nation?s currency....
s often find it uneconomic to issue bonds in their own currencies and so are forced to issue bonds denominated in more stable foreign currencies. This raises the issue of sovereign default
Default (finance)

In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract....
 if the nation cannot afford to repurchase the necessary foreign currency at bond repayment time.






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A sovereign bond is a 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 and/or to repay the principal at a later date, termed Maturity ....
 issued by a national government
Government

Government is the body within any organization that has the authority to make and the power to enforce laws, regulations, or rules. Typically, the government refers to a civil government -- local, provincial, or national -- but commercial, academic, religious, or other formal organizations are also administered by governing bodies....
. Bonds issued by national governments in the country's own currency are also referred to as government bond
Government bond

A government bond is a Bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds....
s.

Nation
Nation

A nation is a cultural and social community. In as much as most members never meet each other, yet feel a common bond, it may be considered an imagined community....
s with very high or unpredictable inflation
Inflation

In economics, inflation is a rise in the general price level of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply ; however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflatio...
 or with unstable exchange rate
Exchange rate

In finance, the exchange rates between two currency specifies how much one currency is worth in terms of the other. It is the value of a foreign nation?s currency in terms of the home nation?s currency....
s often find it uneconomic to issue bonds in their own currencies and so are forced to issue bonds denominated in more stable foreign currencies. This raises the issue of sovereign default
Default (finance)

In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract....
 if the nation cannot afford to repurchase the necessary foreign currency at bond repayment time. Due to the risk of default, investors require the bonds to be issued with a higher yield
Yield (finance)

In finance, yield is a percentage that measures the cash returns to the owners of a security. Normally it does not include the price variations, at the difference of the total Return ....
. This makes the debt more expensive to service, increasing risk of default. In the event of default, unlike a corporation
Corporation

A corporation is a legal entity separate from the persons that form it. It is a legal entity owned by individual stockholders. In British tradition it is the term designating a body corporate, where it can be either a corporation sole or a corporation aggregate ....
 or even a municipal subdivision, a nation cannot file for bankruptcy
Bankruptcy

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor in an effort to recoup a portion of what they are owed or initiate a restructuring....
. But on the rare occasions that a default occurs, just as in defaults on corporate bond
Corporate bond

A Corporate Bond is a Bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date....
s, recent practice has been that the defaulting borrower presents an exchange offer to its bond holders in an effort to restructure the sovereign debt, as has been the case in US dollar denominated bonds issued by Peru
Peru

Peru , officially the Republic of Peru , is a country in western South America. It is bordered on the north by Ecuador and Colombia, on the east by Brazil, on the southeast by Bolivia, on the south by Chile, and on the west by the Pacific Ocean....
 (1996) and Argentina
Argentina

Argentina, officially the Argentine Republic , is a country in South America, constituted as a federation of 23 provinces and an autonomous city....
 (2001). However, getting the bond holders to accept an exchange offer has become very difficult, something caused by the holdout problem
Holdout problem

When a government offers an exchange offer, in an effort to restructure its sovereign debt, some Bond may reject it. Bondholders are so widely diversified that the coordination of bondholders has become very difficult....
.

During the early 1980s, the sovereign bonds of developing nations were a popular investment for Western banks. These created many problems when some nations found it difficult to repay those bonds.

See also

  • Government debt
    Government debt

    Government debt is money owed by any level of government; either central government, federal government, municipal government or local government....
  • Emerging market debt
    Emerging Market Debt

    Emerging market debt is a term used to encompass bond issued by less developed countries. It does not include borrowing from government, supranational organizations such as the International Monetary Fund or private sources, though loans that are securitized and issued to the markets would be included....
  • Brady Bonds
    Brady Bonds

    Brady bonds are United States dollar-denominated Bond , issued mostly by Latin American countries in the 1980s, named after United States Department of the Treasury Secretary Nicholas F....
  • Consols
    Consols

    Consols are a form of British government bond , dating originally from the 18th century. Consols are one of the rare examples of an actual perpetuity: although they may be redeemed by the British government, they are unlikely to do so in the foreseeable future....
  • GKO-OFZ
  • Currency crisis
    Currency crisis

    A currency crisis, which is also called a balance-of-payments crisis, occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value....