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Brady bonds arose from an effort in the 1980s to
reduce the debt held by less-developed countries that were frequently
defaulting on loans. The bonds are named for Treasury Secretary Nicholas
Brady, who helped international monetary organizations institute the program
of debt-reduction. Defaulted loans were converted into bonds with U.S.
zero-coupon Treasury bonds as collateral. Because the Brady bonds were
backed by zero-coupon bonds, repayment of principal was insured.
The Brady bonds themselves are coupon-bearing
bonds with a variety of rate options (fixed, variable, step, etc.) with
maturities of between 10 and 30 years. Issued at par or at a discount, Brady
bonds often include warrants for raw materials available in the country of
origin or other options.
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