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What are Emerging Market Bonds?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 19 September 2016
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Emerging market bonds are a specific kind of bond, or “debt security,” that investors enter into as bond holders. In these kinds of scenarios, the investor buys into a loan that is made to a company or other party, and receives periodic interest payments until the time of bond maturity, when the entire debt is paid to the investor in full. Emerging market bonds focus on a specific kind of corporate bond that many investors are interested in, since they hope to collect large yields based on a thriving future economy.

In general, an emerging market bond is a bond issued by a company that operates within a nation that is known as an “emerging market.” Finance professionals often talk about specific nations as emerging markets where experts have indicated that future financial growth is likely to occur. Traders and investors keep their eyes on emerging markets in order to capitalize on this future growth.

Some finance professionals have built up a consensus about specific emerging markets. One of these is the common acronym, BRIC, that represents four countries that many consider to be emerging markets. These countries are Brazil, Russia, India, and China respectively. Investors who are interested in emerging market bonds may be looking to sponsor a loan to a business within one of these four countries, hoping that a prosperous future in that nation will lead to a lower chance of default and large future gains.

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It is true that certain experts in the field are extremely positive about emerging market bonds, urging clients and investors to steer their way toward bonds for companies in the BRIC countries or other promising economic regions. Others, however, are more circumspect, cautioning investors to look at any lack of regulation or international barriers to transparency in these international companies and their debt securities. Part of holding any corporate or government bond is the risk of default, in which case the bond issuer becomes unable to pay back their loan. Emerging market bonds can create these kinds of risks for investors, just like corporate bonds or government bonds within their own nations.

Investors may consider a range of alternatives for getting involved in emerging market financial plays. A range of mutual funds and other types of managed funds help some single investors to hold stocks or equities in emerging markets, and gain from economic boom times in their nations of interest. A broad Forex or foreign exchange market offers many other opportunities. Emerging market bonds are not the only way to get involved in rapidly growing economies, but they do appeal to investors who are accustomed to holding bonds of all types, and understand the risk versus reward for the average debt security.

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