Fixed-income securities are subject to different legal and regulatory requirements depending on where they are issued and traded, as well as who holds them. Based on the jurisdictions of the issuer and the issuance, a bond can be classified as a domestic, foreign, or Eurobond. This classification has legal, tax, and regulatory implications for issuers and investors.
Legal and Regulatory Considerations
Bonds issued by entities incorporated in the same country are called domestic bonds, whereas bonds issued by entities incorporated in another country are called foreign bonds. Domestic bond markets vary widely across emerging and developed markets, and private and public issuers borrow outside the domestic market for various reasons. Corporate issuers often match the currency of their bond financing cash flows with that of their foreign operations using foreign bonds.
Tax Considerations
The tax treatment of fixed-income securities is an important consideration for both issuers and investors. For corporate issuers weighing the relative cost of debt and equity capital, the tax deductibility of interest expense is an important factor in financing decisions, as discussed in an earlier module on corporate issuers. For investors, bond interest income is usually taxed at the ordinary income tax rate, which is typically the same tax rate that an individual would pay on wage or salary income.
