International Bond Market

The International Banking

& Money MarketPART I

The International Bond Market

Corporate Sources & Uses of FundsSOURCES

OF FUNDS

Internally Generated Cash

Short-term External Funds

Long-term External Funds

Short & Medium Term Bank loans

Publicly or Privately

placed Bonds

International Financial Markets

Markets where foreigners can both borrow and lend moneyImportant international financial centers are London, Tokyo and New YorkImportant financial entrepots or channels are Switzerland, Luxembourg, Singapore, Hong Kong, the Bahamas and Bahrain

The Eurocurrency Market

A Eurocurrency is a dollar or other freely convertible currency deposited in a bank outside its country of origin

E.g. US dollars on deposit in London become Eurodollars

The Eurobond Market

Eurobonds are bonds sold outside the countries in whose currencies they are denominated

Eurobonds are similar in many respects to the public debt sold in domestic capital markets

The International Bond Market

The bond market is a financial market where participants buy and sell debt securities , usually in the form of bonds

As of 2009, the size of the worldwide bond market is an estimated $82.2 trillion , of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to BIS

The International Bond Market

Participants include:

Financial Institutions Governments International Organisations Corporate Issuers

The International Bond Market

The international bond market encompasses two

market segments:

1. Foreign Bonds

2. Eurobonds

Foreign Bonds

A foreign bond is one offered by a foreign borrower to the investors in a national capital market and denominated in the nation’s currency

Example: A German MNC issuing dollar-denominated bonds to U.S. investors

Eurobonds

A Eurobond issue is one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency

Example: A Dutch borrower issuing dollar-denominated bonds to investors in the U.K., Switzerland, and the Netherlands

Bond Markets

The markets for foreign bonds and Eurobonds operate in parallel with the domestic national bonds market and all the three compete with one another

Eurobonds are known by the currency in which they are denominated e.g. Eurodollar bonds, Euroyen bonds, EuroSF bonds etc.

Bond Markets

Sometimes they have colourful names like Yankee bonds ( U.S. dollar), Samurai bonds (JPY), Bulldogs (Stg. Pound)

About 80 percent issues are Eurobonds issues

Eurobonds are usually bearer bonds

Bond Markets

Global Bonds:

A global bond issue is a very large international bond offerings by a single borrower that is simultaneously sold in North America, Europe and Asia

The issues were first offered in 1989

International Bonds- Types of Instruments

Straight Fixed-Rate Issues:

Principal payable on maturity; coupon payments on annual basis

International Bonds- Types of Instruments

Euro-Medium-Term Notes (Euro-MTNs):

Fixed rate notes with maturities from less than a year to about ten years

Euro MTN issue is partially sold on a continuous basis

International Bonds- Types of Instruments

Floating Rate Notes (FRNs):

Medium-term bonds with coupon payments indexed to some reference rate (e.g. 3 month LIBOR)Coupon payments are usually quarterly or semiannual

International Bonds- Types of Instruments

Equity-Related Bonds:

1. Convertible Bond: - allows the investor to exchange the

bond for a predetermined number of equity shares of the issuer

International Bonds- Types of Instruments

Equity-Related Bonds:

2. Bonds with equity warrants: - a straight fixed-rate bond with the

addition of a call option (warrant) feature. The warrant entitles purchase of certain number of equity shares at a prestated price

International Bonds- Types of Instruments

Zero-Coupon Bonds:

Zero- coupon bonds are sold at a discount from face value and do not pay any coupon over their life

International Bonds- Types of Instruments

Zero-Coupon Bonds:

Another form of zero-coupon bonds are stripped bondsA stripped bond is a zero-coupon bond that results from stripping the coupons and principal from a coupon bond (e.g. US Treasury STRIPS)

International Bonds- Types of Instruments

Dual-Currency Bonds:

A dual-currency bond is a straight fixed-rate bond issued in one currency, say, euro, that pays coupon in the same currency

At maturity, the principal is repaid in another currency, say, US dollars

Characteristics of International Bond Market Instruments

Instrument Frequency of Int. payment

Size of Int.

payment

Payoff at Maturity

Straight fixed-rate

Annual Fixed Currency of issue

Floating-rate note

Quarterly Or semi-annual

Variable Currency of issue

Convertible bond Annual Fixed Currency of issue or conversion to equity shares

Straight fixed-rate with equity warrants

Annual Fixed Currency of issue plus equity shares from exercised warrants

Zero-coupon bond

None Zero Currency of issue

Dual-currency bond

Annual Fixed Dual currency

Eurobond Market Structure

Primary Market:

A borrower desiring to raise funds by issuing Eurobonds to investors contacts an investment banker

Eurobond Market Structure

Secondary Market:

Eurobonds initially purchased in the primary market may be resold prior to their maturity in the secondary marketIt is an over-the-counter market with principal trading in London and some other centers such as Zurich, Luxembourg, Frankfurt and Amsterdam

Advantages of the Eurobond Markets

To Borrowers:Size and depth of the market are largeFreedom and flexibility not found in domestic marketsRelatively low costs ( around 2.5%)Interest costs are competitive ( especially dollar Eurobonds)Long maturity periods suitable for long-term funding ( 30 years)Sound institutional framework for underwriting, distribution and placement of securities

Advantages of the Eurobond Markets

To Investors:

Interest can be paid free of income taxIssuers are of high credit standing : government, international organisations or MNCsConvertible Eurobonds – value additionRated instruments

International Bond Amounts Outstanding by Major Instruments

Dec. 2008 Dec. 2009 March 2010

Instrument

Straight fixed-rate 14428.4 17274.2 17235.9

Floating-rate note 7892.0 8357.2 7988.8

Straight fixed-rate with equity warrants

396.7 447.2 446.1

Total 22717.1 26078.6 25670.8

Billions of US Dollars

International Bond Amounts Outstanding by Major Issuers

Dec. 2008 Dec. 2009 March 2010

Financial Institutions 17,925.70 20,030.10 19,531.10

Governments 1,794.60 2,232.20 2,254.40

International Organisations 637.90 791.50 814.10

Corporate Issuers 2,359.00 3,024.70 3,071.20

Total 22717.20 26078.50 25670.80

Billions of US Dollars

International Bond Amounts Outstanding by Major Currencies

Dec. 2008 Dec. 2009 March 2010

Euro 10873.9 12387.6 11813.8

US Dollar 8215.1 9429.0 9718.1

Pound Sterling 1701.8 2145.5 2028.3

Yen 746.7 693.9 668.7

Other 1179.7 1422.5 1441.9

Total 22717.2 26078.5 25670.8

Billions of US Dollars

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