The International Banking & Money Market PART I
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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