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What Is a Domestic Bond?

Jim B.
Jim B.

A domestic bond is a bond that is purchased by an investor within his or her country. This kind of bond contrasts with international bonds, which are bonds issued by institutions located outside the country where the investor resides. There are different institutions likely to issue a domestic bond, including federal governments, local municipalities, and corporations. By issuing bonds, these institutions receive immediate funding, while investors are promised the return of their original capital at the end of the bond term in addition to interest payments which are issued in regular installments.

Bonds, in essence, are loans issued by institutions to individual investors. They are used by the issuers as a way to raise immediate capital. Investors look at bonds as a fixed income investment, meaning that, unlike stocks, bonds are practically guaranteed to return regular payments in the form of interest. For some investors, it can mean something special to invest their funds in an institution located in their own country. These investors might consider it a source of pride to purchase a domestic bond.

Man climbing a rope
Man climbing a rope

The safest type of domestic bond is one that is issued by the government of a particular country. That is due to the fact that such bonds generally have the strength of the country's treasury backing up the issuance. Investors can be generally sure of such bonds and, as a bonus, know that their money is going to help the country where they live. Municipal bonds are issued by local governments and are used to fund various projects within towns and cities.

Another type of domestic bond is a corporate bond, which, as the name implies, is issued by a corporation looking to raise funds. Since such corporations don't have the type of financial safety net that a government might have, these bonds are generally riskier investments. Investors run the risk that they won't get their money back if a corporate issuer goes bankrupt. As a result, corporate bonds often come with high interest rates attached to compensate investors for the risk being taken.

Contrasting domestic bonds are international bonds, which can be purchased from countries all over the globe. There is an inherent safety to a domestic bond that doesn't quite exist in an international bond. Since international bonds are issued in the currency of the country in question, investors have to be concerned with currency exchange rates between their own country and the foreign nation affecting their returns. In addition, it is unlikely that an investor from a foreign country would have much chance of getting back his or her investment should an international corporation default on its bond obligations.

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