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5. International Bonds: (a) These are debt instruments and issued by international agencies,
governments and companies for borrowing foreign currency for a specified period of time. (b)
The issuer pays interest to the creditor and makes repayment of capital.
Features of International Bonds: (a) Issued by U.S. or International Corporations (b) Issued
in amounts of $1000 and greater. (c) Having varying maturity durations. Short term (1-5 Years),
Intermediate (5-10 Years) and Long term (>10 Years).(d) May be subject to Federal, State and
Local Taxes. (e) More risky than Govt. And Corporate Bonds, but they typically offer higher
returns than those offered by corporate bonds. (f) Rated in the same as Corporate bonds. Bondrating companies rate both U.S. Companies and large international Companies. (g) Traded by
brokers and through an exchange. (h) Sometimes callable.
Types of International Bonds: (a) Foreign Bonds: The issuer selects a foreign financial
market where the bonds are issued in the currency of that country. Underwritten by the
Underwriters. These bonds are subject to Government Regulations in the country where they
are issued. (b) Euro Bonds: Denominated in a currency other than the currency of the country
where the bonds are issued. Euro bonds are tailored to the needs of the multinational investors.
In England, Euro bonds with maturity between eight and twelve years are known as
intermediate Euro Bonds. Euro bonds are free from the rules and regulations of the country
where they are issued. (c) Global Bonds: It is the World Bank which issued the global bonds
for the first time in 1989 and 1990. Since 1992, such bonds are being issued also by companies.
They carry high ratings and normally large in size. Presently seven currencies in which such
bonds are denominated, namely, Australian Dollar, Canadian Dollar, Japanese Yen, Swedish
Krona and Euro. (d) Straight Bonds: This is the traditional types of bonds and the rate of
interest is fixed. (Bullet Redemption-Rising Coupon Bond-Zero coupon Bond-Bull & Bear
Bonds). (e) Convertible Bonds (f) Cocktail Bonds: Denominated in a mixture of currency.
The investors purchasing the cocktail bonds get automatically the currency diversification
benefits. (f) Floating Rate Bonds/Notes: Interest rate is varying in nature and the interest rate
is linked to a base rate like LIBOR, and the interest payable on the bond for the next six months
or one year is set with reference to the base rate. (g) Zero Coupon Bonds: Issued at discount,
but long term investments with maturity dates typically starting at 10 to 15 years. (h) Dual
Currency Bonds: These are debt securities that pay coupon interest in a different denomination
that the one in which the bond is issued.
Procedure of the issue of International Bonds:
Step1: The lead manager advises the issuer regarding the main features of the issue, the timing,
price, maturity and the size of the issue & about the buyers potential.
Step2: The issuer prepares the prospectus and other legal documents. The issuers own
accountant, auditor, legal counsel are very important for designing the issue in accordance with
the financial need of the company as well as with regulatory provisions existing in the country.
Step3: Investors look at the credit rating of the issuer as well as who is underwriting the issue.
This is why the lead manager along with co-managers help in the credit rating of the issuer by a
well-recognised credit rating institution.
Step4: This step includes the process of selling bonds. They are institution, such as investment
trust, banks and companies. They often purchase the bond through their buying agents. There
are also trustees who are usually a bank appointed by the issuer. Their duty is to protect the
interest of the investors, especially in case of default by the borrower.
6. Euro Bonds: Euro bonds are bonds of international borrowers sold in different markets
simultaneously by a group of international banks. These bonds are issued on behalf of Govt.s,
Big MNCs etc. Euro Bonds are unsecured securities and hence normally issued by Govt., Govt
corporations and Local bodies which are generally guaranteed by the Govt. Of the countries
concerned and big Multi National borrowers of good credit rating.
Features: (a) Not subject to the costly and time consuming registration procedure.
Requirements are also less stringent than those which apply to domestic issues. (b) Facilitates
negotiation in the secondary market. (c) Euro bonds offer investors, exemption from tax
withholding provisions applicable to domestic and foreign bonds. (d) Commonly denominated
in number of currencies. (e) Having a convertibility clause (f) Coupon payments are made
yearly.
Kinds of Euro-Bonds: (a) Straight Euro-Bond: (Fixed maturity and fixed rate of interest, but
unsecured and bonds holders are general creditors in case of default.) (b) Convertible EuroBond: (c) Bond with Warrants: (Warrant is an option to buy a stated number of common
shares at a stated price during a prescribed period. Warrants pay no dividends, have no voting
rights and become worthless at expiration unless the price of the common stock exceeds the
exercise price) (d) Multiple Currency bonds: (Allows the bond holder receive the interest
payment and the principal in any of the currencies specified in the bond. The bond holder can
choose the currency option) (e) Currency Cocktail or Currency Basket Bonds: Developed to
stabilize the purchasing power of the Coupon. This is accomplished by combining various
currencies as per some weighting process. (f) Yankee Bonds: These bonds are a dollar bond
issued in U.S. by non-U.S. borrowers/companies. (g) Samurai Bonds: It is a yen denominated
bond issued in Japan by non-Japanese companies. (h) Floating Rate Bonds: These bonds are
frequently called floating rate notes. The rate of return on these notes is adjusted at regular
intervals, usually every six months, to reflect changes in short-term market rates.
Advantages of Euro Bonds:
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7. Floating Rate Instruments/Notes (FRN): a. An instrument whose interest rate floats with
prevailing market rates. It pays a 3 or 6 months interest rate set above, at, below LIBOR.
b. All FRNs have Quarterly Coupons. A typical coupon would look like 3 months USD LIBOR
+0.2%.
Features:
1. Issued at the Face Value.
2. Interest is fixed
3. Interest made on half yearly basis
Advantages:
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Disadvantages:
1. Lower opportunity for price gains
2. Having inherent risks
8. American Depository Receipt (ADR)
a. It represents ownership in the shares of a non-U.S. Company and trades in U.S. Financial
Markets.
b. The stock of many non-U.S. companies trade on U.S. stock exchanges through the use of
ADRs.
c. ADRs enable U.S. investors to buy shares in foreign companies without hazards or
inconvenience of cross-border and cross-currency transactions.
d. ADR carry prices in U.S. Dollars, pay dividends in U.S. Dollars and can be traded like the
shares of U.S. Based Companies.
e. Each ADR is issued by a U.S. Depository bank and can represent a fraction of a share, a
single share, or multiple shares of foreign stock.
Features:
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