Q2. Distinguish between Eurobond and foreign bonds? What are the unique characteristics of Eurobond markets?
Foreign BondsA country's foreign bond market is that market in which the bonds of issuers not domiciled in that country are sold and traded. For example, the bonds of a German company issued in the U.S. or traded on the U.S. secondary markets would be part of the U.S. foreign bond market. The definition of "foreign" refers to the nationality of the issuer in relation to the market place. For example, a US dollar bond sold in the United States by the Swedish car producer Volvo is classified as a foreign bond while one issued by General Motors is a domestic bond.
Features of the Foreign Bonds:1. Foreign bonds are sold in the currency of the local economy.
2. Foreign bonds are subject to the regulations governing all securities traded in the national market and sometimes special regulations governing foreign borrowers (e.g., additional registration).
3. Foreign bonds provide foreign companies access to funds they often use to finance their operations in the country where they sell the bonds.
4. Foreign bonds are regulated by the domestic market authorities. The issuer must satisfy all regulations of the country in which it issues the bonds.
Since investors in foreign bonds are usually the residents of the domestic country, investors find them attractive because they can add foreign content to their portfolios without the added exchange rate exposure.
Foreign bonds are known by different names in different countries. They are called Yankee bond, Samurai bonds, Matador bonds, Bulldog bonds and Rembrandt bonds in USA, Japan, Spain, UK and Netherlands respectively.
EurobondsA Eurobond is not a foreign bond issued within the European Union. Rather, it is a bond issued and traded within the mostly unregulated Euromarket. While that market originated within Europe – and is still largely centered there – it is a truly international market. Transactions are not subject to any particular nation's regulations.
A Eurobond is a bond issued outside the country in whose currency it is denominated. A Eurodollar bond that is denominated in U.S. dollars and issued in Japan by an Australian company would be an example of a Eurobond. The Australian company in this example could issue the Eurodollar bond in any country other than the U.S. Usually, a Eurobond is underwritten by a multi-national syndicate of investment banks and simultaneously placed in many countries. For example, to raise funds to finance its European operations, a U.S. company might sell a bond denominated in British pounds throughout Europe.
Features of the Eurobonds:1. Currency denomination: The generic, plain vanilla Eurobond pays an annual fixed interest and has a long-term maturity. There are a number of different currencies in which Eurobonds are sold. The major currency denominations are the U.S. dollar, yen, and euro. (70 to 75 percent of Eurobonds are denominated in the U.S. dollar.) The central bank of a country can protect its currency from being used. Japan, for example, prohibited the yen from being used for Eurobond issues of its corporations until 1984.
2. Non-registered: Eurobonds are usually issued in countries in which there is little regulation. As a result, many Eurobonds are unregistered, issued as bearer bonds. (Bearer form means that the bond is unregistered, there is no record to identify the owners, and these bonds are usually kept on deposit at depository institution). While this feature provides confidentiality, it has created some problems in countries such as the U.S., where regulations require that security owners be registered on the books of issuer.
3. Credit risk: Compared to domestic corporate bonds, Eurobonds have fewer protective covenants, making them an attractive financing instrument to corporations, but riskier to bond investors. Eurobonds differ in term of their default risk and are rated in terms of quality ratings.
4. Maturities: The maturities on Eurobonds vary. Many have intermediate terms (2 to 10 years), referred to as Euronotes, and long terms (10-30 years), and called Eurobonds. There are also short-term Europaper and Euro Medium-term notes.
5. Other features:
Like many securities issued today, Eurobonds often are sold with many innovative features. For example:
a. Dual-currency Eurobonds pay coupon interest in one currency and principal in another.
b. Option currency Eurobond offers investors a choice of currency. For instance, a sterling/Canadian dollar bond gives the holder the right to receive interest and principal in either currency.
A number of Eurobonds have special conversion features. One type of convertible Eurobond is a dual-currency bond that allows the holder to convert the bond into stock or another bond that is denominated in another currency.
A number of Eurobonds have special warrants attached to them. Some of the warrants sold with Eurobonds include those giving the holder the right to buy stock, additional bonds, currency, or gold.