Abstract
This chapter presents a discussion on Brady bonds, which are complex, fixed income instruments. Brady bonds are bonds that have been issued as a part of a restructuring of a country's commercial bank loans and other debt. Existing creditors tender their loans in exchange for the new bonds, which are sovereign bonds. The Brady market is characterized by high yields and liquidity levels, ranging from very liquid to illiquid. Many Brady bonds are large size issues and trade in a liquid market. Due to the features of a Brady bond, they are traded by investors taking a view on the country risk, the yield spread to Treasuries, or the volatility level. The main type of Brady bond is the collateralized fixed-rate par bond or Par bond. These bonds are received in exchange for debt that is tendered at the face value. They offer the debtor permanent interest rate relief and protection from fluctuations in interest areas.
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