Definition
The term baklava bond refers to an indenture issued in Turkey, in Turkish Lira, by a foreign bank or corporation. Baklava bonds are issued when a corporation wishes to raise capital from investors located in Turkey.
Explanation
Foreign corporations that wish to raise funds in Turkey have the option of issuing what are known as Baklava bonds. These bonds are sold by non-domestic entities, including corporations, financial institutions and governments, and are issued in the Turkish Lira. This is typically done when the interest rates in Turkey are low relative to the foreign corporation's domestic rates, which lowers their interest expense.
Since the bond is issued in Turkey's domestic currency, investors located in Turkey are also insulated from currency exchange rate risk. Foreign companies will usually issue these securities if they have plans to establish operations in Turkey. These bonds are also attractive to investors wishing to geographically diversify their portfolios.
Baklava means "many leaves" in the Persian language Farsi, and refers to a pastry perfected in Istanbul. This Turkish dessert consists of layers of phyllo filled with a variety of nuts and spices and drenched in a honey-based syrup.
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