# Understanding Foreign Currency Convertible Bonds (FCCBs) and Their Benefits

## What Is a Foreign Currency Convertible Bond?

A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency other than the issuer's domestic one, allowing companies to raise funds in foreign markets. Like other convertible bonds, FCCBs combine features of debt and equity: they pay regular interest and principal but also give holders the option to convert bonds into stock.

Companies issue them to access global investors or benefit from lower borrowing costs, while investors choose them for the opportunity to earn interest and potentially profit from stock appreciation. FCCBs carry risks tied to currency fluctuations and the issuing company's performance.

### Key Takeaways

*   Foreign currency convertible bonds (FCCBs) are issued in a currency different from the issuer's home currency, allowing companies to potentially benefit from favorable international economic conditions.
*   FCCBs offer investors the opportunity to convert bonds into stock, which can allow them to benefit from stock appreciation, but poses a risk if the stock price remains below the conversion price.
*   Multinational companies often use FCCBs to raise capital globally, taking advantage of favorable interest rates and stable economies abroad, though this comes with potential risks such as exchange rate fluctuations and geopolitical factors.
*   FCCBs can potentially reduce a company's cost of debt due to lower coupon payments compared to traditional bonds, but adverse currency movements can offset these benefits at the bond's maturity.
*   Investors in FCCBs include hedge funds and foreign nationals, who utilize these bonds as part of their investment strategies, often benefiting from attached warrants that activate with stock price increments.  
    

## Key Concepts of Foreign Currency Convertible Bonds (FCCB)

A bond is a debt instrument that provides income to investors in the form of regularly scheduled interest payments called [coupons](https://www.investopedia.com/terms/c/coupon.asp). At the [maturity date](https://www.investopedia.com/terms/m/maturitydate.asp) of the bond, the investors are repaid the full [face value](https://www.investopedia.com/terms/f/facevalue.asp) of the bond. Some corporate entities issue a type of bond known as convertible bonds.

A bondholder with a [convertible bond](https://www.investopedia.com/terms/c/convertiblebond.asp) has the option of converting the bond into a specified number of shares of the issuing company. Convertible bonds have a [conversion rate](https://www.investopedia.com/terms/c/conversion-rate.asp) at which the bonds will be converted to equity. However, if the stock price stays below the conversion price, the bond will not be converted. Thus, convertible bonds allow bondholders to participate in the appreciation of the issuer’s underlying shares. There are various types of convertible bonds, one of which is the foreign currency convertible bond.

> **Important**
>
> A company may choose to issue FCCBs in the currency of a country with lower interest rates or a more stable economy than the issuer's home country.

## Mechanics of Foreign Currency Convertible Bonds

A foreign currency convertible bond (FCCB) is a convertible bond that is issued in a foreign currency, which means the principal repayment and periodic coupon payments will be made in a foreign currency. For example, an American listed company that issues a bond in India in rupees has, in effect, issued an FCCB.

Foreign currency convertible bonds are typically issued by multinational companies operating in a global space and looking to raise capital in foreign currencies. FCCB investors are usually hedge fund arbitrators and foreign nationals. These bonds can be issued along with a [call option](https://www.investopedia.com/terms/c/calloption.asp) (whereby the right of redemption lies with the bond issuer) or [put options](https://www.investopedia.com/terms/p/putoption.asp) (whereby the right of redemption lies with bondholder).

## Important Factors to Consider With FCCBs

A company may decide to raise money outside its home country to gain access to new markets for new or expansionary projects. FCCBs are generally issued by companies in the currency of those countries where interest rates are usually lower than the home country or foreign country economy is more stable than the home country economy. Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the issuer than a straight coupon-bearing plain vanilla bond, thereby, reducing its debt-financing costs. In addition, a favorable move in the exchange rates can reduce the issuer’s [cost of debt](https://www.investopedia.com/terms/c/costofdebt.asp), which is the interest payment made on bonds.

If the local currency weakens by maturity, exchange rate changes can cause repayment costs to outweigh any savings from lower interest rates, leading to losses. Issuing bonds in another currency can expose issuers to political, economic, and legal risks in that country. If the issuer's stock price drops below the conversion price, investors won’t convert to equity, forcing the issuer to repay the principal at maturity.

An FCCB investor can purchase these bonds at a stock exchange, and has the option to convert the bond into equity or a [depositary receipt](https://www.investopedia.com/terms/d/depositaryreceipt.asp) after a certain period of time. Investors can participate in any price appreciation of the issuer’s stock by converting the bond to equity. Bondholders take advantage of this appreciation by means of [warrants](https://www.investopedia.com/terms/w/warrant.asp) attached to the bonds, which are activated when the price of the stock reaches a certain point.

## The Bottom Line

Foreign currency convertible bonds (FCCBs) blend debt and equity, giving companies a way to raise capital in foreign currencies while offering investors steady interest and the option to convert into stock. They are particularly attractive to multinational corporations seeking to reduce borrowing costs or capitalize on exchange rate benefits.

FCCBs do carry risks, however, including currency swings and geopolitical factors that can make repayment more costly. For investors, the conversion feature provides an opportunity to benefit from rising stock prices, though holders can opt not to convert if conditions are not favorable. Both issuers and investors should assess the wider financial and market conditions to ensure FCCBs fit their financial goals.