The international bond market is divided into three bond market because they receive the benefit of regular
groups: coupon payments plus the option of locking in to
Domestic bonds a better yield later. They are issued locally by a domestic borrower and are Characteristics of Eurobonds usually denominated in the local currency. The first Euromarket was the market for short-term Foreign bonds USD deposits and USD loans. This market is called They are issued on a local market by a foreign borrower the Eurodollar market, which is a segment of the and are usually denominated in the local currency. Foreign Eurocurrency market. The Eurocurrency market bond issues and trading are under the supervision of local rapidly became a broader market, including different market authorities. currencies. The Eurocurrency market for short-term Eurobonds deposits (Eurodeposits) rapidly became a reference They are underwritten by a multinational syndicate of market for domestic marketmakers. For example, banks and placed mainly in countries other than the one in several domestic instruments started to be priced whose currency the bond is denominated. These bonds are taking the interest rate on Eurodeposits as the relevant not traded on a specific national bond market. discount rate. The Eurocurrency market is a money The Eurobond market market for short-term funds. Most of the assets and an offshore market where borrowers and lenders meet liabilities are of less than one year's maturity. For because of its lower costs and lack of regulation medium or long-term funds the main market is the one segment of the so-called Euromarket, Eurobond Market. A Eurobond is an international which also includes: debt security and its structure is similar to the Eurocurrency, Euronotes, Eurocommercial paper, and standard debt security used in domestic bond markets. Euroequity markets. The basic characteristics are listed below: i. a Euromarkets are offshore capital markets, in the sense that Eurobond is a debt contract between a borrower and the currency of denomination is not the official currency of an investor, which records the borrower's obligation the country where the transaction takes place. to pay interest and the principal amount of the bond For example, a Malayan firm deposits USD not in the U.S. on specified dates. ii. a Eurobond is transferable. iii. a but with a bank outside the U.S., for example in Singapore Eurobond is intended to be tradeable. iv. a Eurobond or in Switzerland. This USD deposit outside the U.S. is is a medium- to long-term debt security. v. a called an Eurodeposit. Eurobond is generally launched through a public For example, the first Euromarket was the market for short- offering and listed on a stock exchange. It is a term USD deposits and USD loans, where European banks fundamental, and for all practical purposes essential, acted as intermediaries between investors and borrowers. requirement of a Eurobond that it be transferable; and Zero-coupon bonds its transfer should be simple. Transferability can be a zero-coupon bond is a straight bond with no schedule of achieved by a number of techniques, but two periodic interest payments. particular methods are generally used. The cash flow consists of two payments, the receipt of the proceeds on issue date and the repayment of principal on Foreign Bond Markets maturity. Ninety years ago, the international bond For the issuer, zero coupon bonds are an ideal financing markets consisted solely of foreign bonds, instrument for a project, which generates no income for that is, bonds issued, placed, and traded in some years. a bond market which was foreign to the On the other hand, the loading of the debt service of the issuer's country of incorporation. These bond into a single payment some years later creates a markets had most of the features that are higher credit risk. standard in today's bond markets: XII.28 For this reason the market is confined to highly rated i.- Issuers were typically foreign governments borrowers. or private sector utilities such as railway Investors are attracted to zero-coupon bonds to meet companies. future liabilities. ii.- Issues were subscribed by retail and Convertible bonds: institutional investors. A convertible bond is a bond that can usually be iii.- Issuers and investors were connected by exchanged or converted at the option of the continental private banks and old London holder into other assets at a fixed conversion rate merchant houses. set at time of launch. Convertible XII.9 bonds iii.- Underwriting and the syndication of are usually launched in conditions of poor fixed- underwriting risk were established practices, and rate bond markets, high interest rates and an the structure of a bond was similar to that expectation of falling rates. prevailing today. Issuers benefit from (1) the lower funding costs relative to short-term money markets and (2) the possibility of no repaying the principal if the conversion right is exercised. Investors benefit Domestic bonds are usually underwritten by a syndicate of national banks. Dutch, British, Canadian and Swiss government bonds are sold under a tender system, where banks place bids. In the U.K. once an issue has been listed, the Bank of England often sells part of a gilts issue directly on the market through its broker. Eurobonds are issued through an international syndicate of financial institutions. Institutional investors may buy new bonds directly a few days before they are officially issued. This is the socalled gray market. In the Eurobond market bonds are sold under a variety of procedures: the traditional issuing system, the bought deal, the FPRO, and the tender system. Why Do Investors Care About International Bonds? *We already know the answer to the above question: portfolio diversification. From the point of view of returns, the U.S. bond market has been generally attractive, but from 1986 to 2011 the U.S. bond market has never ranked first. Since 1986, the Australian, British and Japanese bond markets have outperformed the rest of the developed bond markets three times each, while the Canadian, French, and Swedish bond markets have outperformed the rest only one time each. While investing in foreign bonds can increase your returns, adding foreign bonds can significantly reduce the overall risk of your bond portfolio. Diversification also works in the world bond market. The lower the correlation, the greater the diversification benefits. Within the domestic U.S. bond market, correlations are relatively high. These high correlations reflect common sources of uncertainty in U.S. monetary and fiscal policies as well as in U.S. economic activity. Therefore, as the number of U.S. fixed-income instruments in the portfolio increases, the reduction in risk soon becomes marginal. Foreign policies, however, are not synchronized with those of the U.S. Because of the lack of co-movements across national markets, the risk reduction attained from investing in a given number of global securities is likely to be much greater.
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