Q:

International bonds, currency differences, and effect of inflation on such bonds?

Country X's national government purchases country Y's government-issued bonds. Would the bonds be issued in country Y's currency?
How does inflation (of either country's currency) factor into this, especially when the bonds mature, say, 10 years later?

A:

As usual on a marketplace - depends on the buyers and sellers. Any country would love its bonds to be denominated in its own currency. However, the bond buyers need to trust the currency the bonds issued in, otherwise they wouldn't invest.
Bond terms vary as well. Some have fixed interest, some variable, some promise inflation adjustments, some don't. Again - whatever the buyers and the sellers can agree upon.
In the US for example, the bonds are denominated in the US dollars, own currency. Some bonds have inflation protection (as mentioned by JB King). However, in Greece, the bonds are denominated in EUR, which is the currency used in Greece, but not controlled by Greece. In Russia, bonds are denominated in EUR or USD, neither is used nor controlled by the Russians. Similarly most of the world uses USD or EUR for international transactions with very rare exceptions. Thus the country's inflation doesn't affect the bond value (the US/EUR inflation does, though).

