The Largest International Bond Market In The World Finance Essay
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Firstly, it is important to define what a bond is. A bond is a debt instrument requiring the issuer a business, a bank, an international organization, or a government to repay to the investor (the lenders) the amount borrowed plus interest (coupon rate) over a specified period. Terms are contractually fixed. Bonds issued specify a fixed date when amount borrowed is due and a remuneration (which may be fixed or variable) indexed to interest rate and not the result of the company. Default risk is reflected in yields. Indeed, the higher yields the bond provides, the more risky the investment. In order to attract investors, companies offer a higher return than the government. The bond rating help in estimating the default risk.
The bonds are traded on the bond market. The development of bond market has enabled companies and government, to diversify their sources of funding. In the international bond market, we can bring out three main markets:
Domestic bond market: the bonds are issued by a domestic borrower in his own country. Most of time, we can find bonds denominated in the local currency.
Foreign bond market: a foreign borrower issues bonds on another market than his local market. Most of time, we can find bonds denominated in the local currency. Exchanges of bonds issued by a foreign entity are under local market authorities' control.
We have to determinate what a Eurobond is. The word "Eurobond" might be misunderstood. Indeed, Eurobonds do not mean bonds of European countries or euro-denominated bonds. The original sense of the world is given in this definition "A Eurobond is a bond underwritten by an international syndicate and sold in countries other than the country of the currency in which the issue is denominated" The Online Encyclopedia. In others words, the bond is issued and traded in a currency which is not the home currency of the investors. Eurobonds are not traded on a specific national bond market. Thus, Eurobonds are not subjects to the rules of any country. They are issued and traded within an unregulated market. Usually, a Eurobond is issued by an international syndicate (a group of banks that acts jointly).
Eurobond market is separated into two different markets:
Primary market (first issue of bond).
Secondary market (sell your own Eurobond to another investor). Eurobonds bought in the primary market can be sold prior to their maturity in the secondary market. In this market, Eurobonds are traded over-the-counter.
Moreover, the Eurobond market is separated into sectors; the different bonds are classified taking account of the currency in which it is denominated.
We can take this example to show what a Eurobond is. Firm headquartered in Scotland issues bond and increases capital in China denominated in Pound sterling. In this case, this is a Eurobond called Euro Sterling Bond. If the Scottish company issues bond in US Dollar in China, it is also a Eurobond called Euro Dollar Bond.
In the United States, during the sixties, there was unfavorable tax regime in the bond market. That's why, American companies started to issue US Dollar denominated bond outside their own country. Thus, the Eurobond market became widespread. The First Eurobond was issued in 1963. This market is still growing under development.
Usually, the borrowers or investors in the Eurobond markets are large companies, international organizations or financial institutions and governments and not individuals. In order to raise funds, the governments or companies (the borrowers) can issue and sell bonds. Thus, they attract investors who want to deposit money. Each entity wins: the firms and the governments find money to finance their activities and the investors are repaid plus interest.
Investors and issuers prefer to use the Eurobond markets for several reasons:
The main reason why an issuer choice the Eurobond markets is that it is cheaper to obtain financing. Eurobonds are not subject to tax and largely free from government regulation. There is a great borrowing flexibility. Issuers can choice the country in which to sell their bonds. Thus, they choice countries where there is the least amount of constraints. They have to choice which country has the best bond legislation. In this manner, they can reduce their borrowings costs. That is why; obtaining financing on the Eurobond markets is cheaper than the other market.
And, they can propose advantageous offers. Indeed, to attract investors, issuers have to offer investors the well-price financing (at least as competitive as those available in the long-term or equity markets in their own countries). Moreover, income investors are not subject to double tax (borrowing country and home country). Hence, the Eurobond markets give an investor a possibility of achieving a higher yield on investments (advantageous offers from issuers and less income tax). Thus, Eurobond market regulation also benefits investors.
The Eurobond market is considered as extremely liquid. The liquidity of a bond depends on the ability to be bought or sold without price concessions investors usually require bond liquidity. The Eurobond markets have high liquidity because Eurobond trading takes place 24 hours a day worldwide.
The Eurobond markets are easily accessible. Hence, the companies or others investors can obtain financing in an economy where financing is hard to obtain. Issuing Eurobonds gives companies wider access to the international market which they may normally not be able to access. Moreover, this wider access to the international market increases the international recognition for the companies.
The international Eurobond market is composed of a wide range of investors. It is easy for the issuers to find investors who want to deposit money.
Usually, some large firms issue Eurobonds to raise funds in order to set up a subsidiary abroad. Take a UK-based company for example. It wishes to establish its operations in China; the firm has to obtain Chinese Yuan for the operation. Therefore, the company must issue Eurobonds in Chinese Yuan which be sold to the buyers owning Chinese currency in another country than China. Thus, the company obtains Chinese Yuan by way of compensation of Eurobonds. Then, it gives money to its subsidiary qua loan. In the future, the subsidiary will start making money. The latter will give its profit to reimburse the interest on the loan bore by the parent company.
The fact of issuing Eurobonds gives the ability the parent company to reduce the risk. Indeed, the currency risk is avoided because its liability (Eurobond in Chinese Yuan) is brought into balance by its asset (loan in Chinese Yuan), thereby, the firm will not be subject to modifications in the value of Chinese Yuan.
When a bond is issued, investor's name has to be registered when he buys the bond (registered form) either or the investor does not need to give his name, he can own directly the Eurobond (bearer form). Usually, the Eurobond markets us the bearer form because there is no central register. Thus, the buyer can keep his anonymity. Eurobond permits to keep investor's identity hidden. It is a key characteristic for. Investors prefer to keep anonymity.
And logically, instead of issuing shares to increase funds firms can use the Eurobond markets. In this manner, companies keep the whole control of it strategy.
A Eurobond is a special bond. Indeed, it is not subject to regulations and constraints governments. Eurobonds are not traded on a specific national bond market. The Eurobond market is probably one of the most attractive bond markets for both issuers and investors. This is mainly due to the self-regulations and flexibility of this market. The issuer can reduce borrowing costs and find easily anywhere and anytime an entity which want to deposit money. The investor can achieve a higher yield on investments and keep his identity hidden.
Today, the Eurobond market is the largest international bond market in the world.
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