A peso-denominated bond that is issued by the Mexican government and whose coupons and principal are indexed to the U.S dollar at the spot rate in effect at the time of issuance. The extended issuance of tesobono bonds was one of the many factors that contributed to the Mexican peso crisis- the “tequila crisis“- that hit in 1994.

Mexico usually issues these peso-denominated, US dollar-linked bonds in order to convince international investors of buying Mexican debt that is free of exchange rate risk. Foreigners who buy tesobonos pay in a foreign currency such as US dollars, and when they redeem their tesobonos, at a future date, they are also paid in US dollars. Therefore, international investors are said to be immune from changes in the dollar value of the peso between the time of purchase and the time of redemption. The currency risk is assumed not by foreign investors but rather by the government of Mexico. If the peso were to depreciate or be devalued, then the government, and ultimately Mexican taxpayers, would bear the losses.