EURO BONDS

Bonds meaning & features

Bonds refer to the statements of debt. Bond markets are part of the capital markets. It is a promise to repay money borrowed after a particular period of time with certain rate of interest. The issuer is equivalent to the borrower and the bond holder to the lender. Bonds enable the issuer to finance long-term investments with external funds.

 Government bonds refer to the bonds issued by the Government or the government department of a country in its own currency. The money raised from the bonds maybe used to finance various activities like building roads, hospitals, infrastructure etc. Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is mostly done via the computer or the telephone.

Eurobonds
A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. E.g. a Yen note floated in Germany. Offered simultaneously in different capital markets. Maturity ranging between 5-15 years. Ex : 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.

 Eurobond is normally a bearer bond, payable to the bearer. Eurobonds are usually bearer bonds that pay interest annually without deduction of tax. Usually, no official records are kept. The majority of Eurobonds are now owned in 'electronic' rather than physical form. The bonds are held and traded within one of the clearing systems Cedel or Euroclear

 Buyers deposit the eurobond with either of the two clearing houses. Interest paid by the issuer may be collected by the clearing house on behalf of the euro bondholders. Clearinghouse maintains absolute secrecy with regard to the holder of eurobonds, by assigning a number to a particular bondholder. Sale of eurobonds is routed through the clearinghouse concerned.

Underwriting
Underwritten by a multinational syndicate of investment banks and simultaneously placed in many countries. Multinational managing syndicate sells the bonds to a large underwriting crew.

Types of Eurobonds
Dual Currency Bond or Currency Option Bonds: A eurobond issued in one currency (say USD) with an option to take interest payments and principal payments made in another currency (say pound sterling) Floating rate interest : Bond issued with floating rate interest. Zero Coupon eurobond :

Straight or fixed rate bonds

These are the traditional bonds which are debt instruments carrying a fixed interest with a fixed maturity period. Interest payable at a fixed predetermined interval, say 6 months or 1 year. The period of such bonds vary from 5 to 25 years but commonly bonds are issued by a period of 15 years.

Straight or fixed rate bonds

some bonds are issued with a clause that the bonds are redeemable by the issuer, at issuers choice, prior to its maturity at a price which is above the face value (call price). There are known as callable bonds and are a simple variant of straight bond.

Straight or fixed rate bonds

A puttable bond is another variant of straight bonds and is opposite to callable bond. It allows the investor to surrender the bonds to the issuer of the bond prior to maturity of the bonds, at the discretion of the investor, after a certain period after issue.

Floating rate bonds/Notes:

The interest rate is varying in nature 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. The rate of interest is adjusted every six months or one year depending on the terms for the issue.

Floating rate bonds/Notes:

i.e. if an investor invests for a period of say 10 years and if the money market shows gradual increase in the interest rates his funds do not get blocked at lower rates but interest keep changing with the changes in the interest rates in the market FRNs are normally issued by bankers.

Zero Coupan Bonds:

These bonds are purchased at a substantial discount from the face value of the bond and are redeemed at face value on maturity. No interest will be paid. The difference between the purchase price and face value is the return on the investment.

Euro Convertible Bonds

Bonds with an option to convert them at the discretion of the investor into the equity shares of the issuing company. In India they are called Foreign currency Convertible Bonds FCCBs)

Different options
INSTRUMENT Straight fixed-rate Floating rate note Convertible bond INTEREST FREQUENCY annual annual or quarterly annual COUPON TYPE Fixed Variable Fixed Fixed Zero Fixed Fixed CURRENCY PAYOFF Currency of issue Currency of issue Currency of issue or convertible Currency of issue plus shares Currency of issue Dual Currency Composite currency

Straight fixed-rate with annual equity warrants Zero-coupon bond Dual-currency bond Composite currency bond none annual annual

Distinction between Eurobonds, domestic bonds and foreign bonds

Domestic bonds are bonds issued by a resident issuer in the country of its residence, denominated in the currency of the country. Example: State Bank of India bonds sold in India to Indian residents denominated in Indian rupees is domestic bond.

 Foreign bonds are bonds issued by a non resident entity denominated in the currency of the country where the bond is issued. Example: India Development Bonds issued by State Bank of India in U.S.A. denominated in U.S. dollars and in Yen in Janpan are foreign bonds. Eurobonds are bonds denominated in a currency other than the currency of the country in which they are issued. Example: A German multinational issuing bonds in London denominated in U.S. dollar qualifies for a Eurobond.

 The foreign bonds and domestic bonds are subject to regulations by regulatory authorities and disclosure norms while Eurobonds are not governed by any such regulation or disclosure norms. Many Eurobonds are listed on stock exchanges in Europe and this require filing of certain financial reports by the issuers to the exchange on a regular basis.

Foreign Bonds
These are the bonds floated in the domestic market denominated in domestic currency by non-resident entities. Dollar denominated bonds issued in the US domestic markets by non-US companies are known as Yankee Bonds, Yen denominated bonds issued in Japanese domestic market by non-Japanese companies are known as Samurai Bonds and Pound denominated bonds issued in the UK by non-UK companies are known as Bulldog Bonds.