What is a Dollar Bond?

Malcolm Tatum

Dollar bonds are municipal bonds that are quoted with a specific dollar price rather than basing the quote on a percentage. This type of bond is relatively common and is issued regularly. A dollar bond is also traded based on the dollar price and not on the yield to maturity like other types of bonds.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

An alternative definition of the dollar bond is also focused on using a dollar price rather than a yield to maturity. In this scenario, the dollar bond is a term applied to any type of bond issued that is quoted and traded in United States dollars. Within the perimeters of this definition, the bond in question can be a bond issued by municipality in the United States, or by a foreign corporation that has a presence within the USA.

In both approaches, the key factor is the use of the dollar price rather than a percentage. Investors who prefer the more simplistic approach often find the dollar bond is more to their liking. Because the quote is in an identified currency, it is possible to project how much of a return will eventually be earned, assuming the currency performs as projected. Making this projection and taking into account all relevant factors that could cause the dollar to fluctuate in value. This factors include shifts in the economy that take place as part of the normal progression of markets, political changes, and the potential for natural disasters to occur during the life of the bond that would impact the issuing entity in some manner.

While there are several examples of the dollar bond, three types of bonds are most commonly cited. Term bonds are considered to be an excellent example of a dollar bond. A municipal bond such as a public housing authority bond is usually structured as a dollar bond. Tax-exempt notes also are often structured as dollar bonds in order to keep the projections and return simple to project and calculate.

There is usually not any significant difference in the return achieved with a dollar bond versus other types of municipal bonds. The main advantage is the ease of understanding how the bond issue works, which is often attractive for newer investors who may not yet grasp the concept of a yield to maturity. Like all bond issues, the dollar bond is considered to be an investment with relatively low risk involved. While the return may be more modest than other forms of investment, the dollar bond is an excellent way to incrementally build a financial portfolio and lay a foundation for planning for the future.

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