Legal, Regulatory, and Tax Considerations of Fixed-income Securities

Fixed-income securities depend on laws and regulations of the place of issuance, where bonds are traded, and the holders of bonds.

National and Foreign Bonds

National bonds are issued and traded in a country. Domestic bonds are issued by local entities, while entities from other countries issue fixed-income securities called ‘foreign bonds.’ For example, when General Motors issues bonds in the United States, these are domestic bonds, whereas if Toyota issues bonds in the United States in US Dollars, these are foreign bonds.

Eurobond Market

The Eurobond market was developed in the 1960s largely to avoid regulatory and tax issues, especially in the United States. Eurobonds are denominated in a currency other than the country’s home currency or market in which they are issued. They are less regulated, usually unsecured, and underwritten by an international syndicate. Eurobonds are usually in bearer bond form. This means that the trustee does not keep a record of the owners so that the company issuing the bond is free of withholding tax. Conversely, most other bonds are registered bonds. This means that the bond owner’s name and contact information are recorded and kept on file with the company, allowing it to pay the bond’s coupon payment to the appropriate person.

Taxation of Bonds

The income portion of bond investments is taxed at the income tax rate as any other income. However, there may be tax-exempt securities such as US municipality bonds. A bond investment may also generate a capital gain or loss. Some countries have different tax rates for long-term and short-term capital gains. For instance, income recognized for more than 12 months is assumed to be a long-term capital gain and taxed at the long-term capital tax rate.

Question 1

If a Canadian mining company decides to go to Australia to issue bonds denominated in Canadian dollars, this would be an example of a:

1. Eurobond.
2. Bearer bond.
3. Foreign bond.

The correct answer is A.

Eurobonds are denominated in a currency other than the home currency of the country or market in which it is issued.

On the other hand, if a Japanese company issued bonds in Canada denominated in Canadian dollars, this would be an example of a foreign bond.