Brady bonds, proposed by U.S. Treasury Secretary Nicholas Brady in 1989, aimed to help reduce debt in developing countries, particularly in Latin America facing defaults in the 1980s. These long-term bonds have features such as call options, step-up coupon payments linked to inflation, and allow commercial banks to replace non-performing debts. However, they carry risks including interest rate risk, sovereign risk due to political instability, and the potential for default by the issuing country.

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Brady Bonds

2. 1. History
2. Key Features
3. How it Works?
4. Risk with Brady Bonds
5. Reference
Content

3. Nicholas Brady is the inspiration for the Brady bonds. In 1989, when Brady was the U.S. Treasury secretary, he came up
with a proposal to help reduce the debt of the developing countries. The Latin American countries were the first to use
these bonds. The need for such a bond was felt after many Latin American countries start to default on their debt in the
1980s.
Along with the U.S., this program calls for international lending agencies, including IMF and World Bank to assist
commercial banks in restructuring the debt.
History

4. • Long-term in nature and have maturities up to 30 years.
• These bonds may have a call option attached to them
• Step-up coupon payments after certain years and linked to the inflation rate could be another feature.
• These can be of various types, like At Par Bonds, Discount Bonds, Debt Conversion Bonds, Front Loaded Interest
Reduction Bonds, etc.
Key Features

5. It allows the commercial banks to replace their debt with these bonds. This way developing countries are able to remove
their non-performing debt and replace it with new bonds.
The issuing country buys zero-coupon bonds from the U.S. Treasury. These bonds are of the same maturity as the Brady
bonds. Now, these zero-coupon bonds are kept in the Federal Reserve escrow until maturity. At maturity, the issuing
country sells these zero-coupon bonds to make the principal payment. In the event of non-payment, the holder of the
bond gets the principal at maturity.
How it Works?

6. 1. The interest rate risk is unavoidable because of the inverse relation of the bond prices and interest rates
2. Sovereign risk in these bonds could be higher if the issuing country suffers from political or economical instability.
3. Investors do face the risk of default by the issuing country.
Risk with Brady Bonds

7. Reference
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