a. The domestic bonds are issued in the home country in the currency of that country. For example, a U.S. company issuing the bonds in the U.S. Dollar in the U.S.A.
b. The foreign bonds are the bonds that are issued by the issuing entity in some other country, i.e. the issuing entity is not of the target country, for example, an American company issuing bonds in Japan in Yen.
c. The issuer of the bond is supposed to follow the legal and regulatory requirements of the country in which the bonds are issued.
d. The Euro Bonds are issued in the currency of one country but sold in other countries. These bonds are:
i. originally created to avoid legal, regulatory, and tax constraints in the issuing countries;
ii. named after the currency of denomination (for example bonds issued in dollars are called Eurodollar bonds);
iii. issued outside the jurisdiction of any single country; and
iv. typically unsecured, bearer bonds.
1.1. Tax Implications
a. There are two types of incomes from fixed income securities, i.e. interest and capital gains.
b. The interest income is the normal income and taxable unless it is tax-exempt in any state.
c. Capital gains are two types, i.e. short-term capital gains and long-term capital gains.
i. The long-term capital gains are taxed at a favored rate, which is less than the normal rates, in most countries.
ii. The short-term capital gain is usually treated as normal income, taxable at normal rates in most countries.
d. The zero-coupon bonds are issued at a discount and redeemed at par. Thus, the amount of difference between the issue price and the par value, e. discount is entirely treated as the interest income (and not capital gain). The implied interest on such income is subject to tax each year.
e. If a normal bond, carrying coupons is issued at a discount, then the discount portion of this bond is also treated in a similar fashion, as the zero-coupon bonds. Thus, each year a number of coupon payments received and the implied interest on discount is treated as interest income for tax purposes.
f. If, however, the bonds are issued at a premium, the amount of premium is treated as the implied capital loss each year (on which there is generally no tax benefit receivable to the investor).