Question: A while ago you described bonds to someone who inherited them. We have old Brady Bonds but know nothing about them.

A BuyandHolder

Answer:

Dear BuyandHolder,

These bonds were first issued in the 1980s by governments of developing countries - most often those in Latin America - and sold to the public. They were U.S. dollar denominated and came into being as part of a plan to reduce the debt held by these economically unstable countries - countries that were frequently defaulting on their loans.

They were named after Nicholas Brady who was the U.S. Treasury secretary at the time and who was instrumental in setting up this program of international debt reduction.

In the process, defaulted commercial loans were actually converted into "Brady bonds." This accomplished two things. (1) It enabled banks to get rid of high-risk loans and improve their balance sheets. (2) It provided much needed funds to financially troubled countries.

Among the countries that issued Brady Bonds were: Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Ecuador, Mexico, Morocco, Nigeria, Philippines, Poland and Uruguay.

Overall, Brady bonds were considered high in safety because the principal was usually (but not always) collateralized by specially issued U.S. 30-year Treasury zero coupon bonds. These bonds were purchased by the debtor country using the country's own financial reserves as well as money from the International Monetary Fund and/or the World Bank.

Adding to their popularity was the fact that in some cases, interest payments were guaranteed by AA-rated securities held with the Federal Reserve Bank of New York.

These coupon-bearing bonds came with a number of options. (1) Rates could be fixed, variable or increased in steps. (2) They were issued either at par or at a discount. (3) They had numerous maturities ranging from 10 to 30 years. (4) Some Brady bonds even had warrants for the country's raw materials.

Brady bonds stopped being issued during the 1990s. And, in 2003, Mexico retired its Brady debt. I recommend that you read the Treasury Department's press release about the retirement of the Mexican bonds. John Snow's comments are not only informative but quite moving. Go to: http://www.treas.gov/press/releases/js477.htm.

Good luck!