A bond that pays interest in one currency but pays the principal in a different currency. The amount of the principal repayment is set at initiation and paid at maturity. This principal amount usually allows for some appreciation in the exchange rate of the stronger currency. These issues are common in the Eurobond market and are a useful source of capital for multinational companies.
There are three methods used in applying the exchange rate to principal and interest payments from dual currency bonds:
1. The use of the prevailing exchange rate when the bond is issued
2. The use of the existing exchange rate (spot rate) at the time cash flow payments are made
3. The use of the currency that is chosen from the two currencies by the investors or issuers of these bonds - also known as an "option currency bond"