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What Is a Dragon Bond?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 22 September 2016
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A dragon bond is a long-term debt obligation issued by an Asian nation other than Japan and denominated in foreign currency. Such bonds provide access to foreign investment and can attract funds from outside the country. Like other bonds, they are bought and sold on secondary markets, and can be an area of lively financial activity in some regions. Investors with an interest in dragon bonds can access listings, reviews, and other information through financial publications.

Nations throughout Asia and the Pacific Islands can issue dragon bonds. China is one of the leading producers of such investments. The bonds can fund a variety of activities for companies and agencies that need access to capital for projects. Interest and repayment terms can vary, but are all calculated in a foreign currency. The United States Dollar (USD) is a common choice, as it is viewed as an international standard for investment activity.

Buyers of a dragon bond can choose to hold on to the bond, collecting interest and the eventual payment, or they can sell it on the secondary market. Bonds can also be pooled in mutual funds and other group investments, where they may add reliability, depending on their origins. Like other debt obligations, dragon bonds can represent a risk, because the issuer might not be able to redeem the dragon bond at the time it becomes due.

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For Asian nations, dragon bonds can provide a method for enticing foreign investors. Overseas investors may be reluctant to buy bonds in local currencies because of their instability or poor performance on the foreign exchange market. This might limit domestic bonds to domestic buyers, who do not necessarily have access to the kind of capital bond issuers need for projects. A dragon bond offers a foreign investment opportunity to appeal to institutional investors and high net worth individuals from outside the country.

Trade publications and financial media offer information on current and proposed dragon bond offerings, as well as performance on past investments. This information can help investors decide where and when they want to invest money. For those interested in diversification, a fund may be a more suitable vehicle, as it provides access to a carefully balanced mixture of investments to maximize yield and minimize risk. Funds may be administered by financial institutions, private brokers, and other entities, and it is advisable to review their records carefully to develop an accurate picture of their performance.

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