A foreign pay bond is a type of bond that allows the investor to choose the currency in which to receive interest payments, usually between the currency of the issuer's country and a foreign currency. This feature provides flexibility for investors who may want to manage currency risk or take advantage of fluctuations in exchange rates.
Review of Other Options:
A. Eurobonds:
Eurobonds are international bonds issued in a currency other than the currency of the country where they are issued. However, they do not provide the investor with a choice of interest payments in different currencies.
C. Subordinated Debentures:
These are unsecured bonds that rank below other debts in terms of repayment priority in case of liquidation. They do not involve currency options for interest payments.
D. Floating-Rate Securities:
These bonds have variable interest rates that adjust periodically based on a benchmark interest rate, such as LIBOR or prime rate, but they do not allow investors to choose the currency of interest payments.
Why B is Correct:
Foreign pay bonds are explicitly designed to offer investors a choice of interest payments in two currencies, making them unique among fixed-income securities. This feature provides added flexibility for investors dealing with foreign exchange considerations.
References:
Canadian Securities Course (CSC), Volume 1, Chapter 6: Fixed-Income Securities – Features and Types. Detailed explanation of foreign pay bonds and their distinguishing features.
Discussion of bond types and their characteristics, including Eurobonds and floating-rate securities, in Chapter 6.
