A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. Also called external bond; “External bonds which, strictly, are neither Eurobonds nor foreign bonds would also include: foreign currency denominated domestic bonds…” Money may be raised internationally by bond issues and by bank loans. This is done in domestic as well as international markets. So, the question is – Meaning, Definition, Types, and Advantages of Eurobonds.
The Concept of Eurobonds explains in Meaning, Definition, Types, Characteristics, and Advantages.
It can be categorized according to the currency in which it is issued. London is one of the centers of the Eurobond market, with Luxembourg being the primary listing center for these instruments. The difference is that in international markets the money may come in a currency which is different from that normally used by the borrower. A foreign bond is a bond issued in a particular country by a foreign borrower. Eurobonds are bonds underwritten and sold in more than one country.
Meaning and Definition:
A foreign bond may be defined as an international bond sold by a foreign borrower but denominated in the currency of the country in which it is placed. It is underwritten and sold by a national underwriting syndicate in the lending country. Thus, a US company might float a bond issue in the London capital market, underwritten by a British syndicate and denominated in sterling. The bond issue would be sold to investors in the UK capital market, where it would be quoted and traded. Foreign bonds issued outside the USA are called Yankee bonds, while foreign bonds issued in Japan are called Samurai bonds. Canadian entities are the major floaters of foreign bonds in the USA.
A Eurobond may be defined as an international bond underwritten by an international syndicate and sold in countries other than the country of the currency in which the issue is denominated. In the Eurobond market, the investor holds a claim directly on the borrower rather than on a financial institution. Eurobonds are generally issued by corporation and governments needing secure, long-term funds and are sold through a geographically diverse group of banks to investors around the world. Eurobonds are similar to domestic bonds in that they may be issued with fixed or floating interest rates.
An Issue of Eurobonds:
The issue of Eurobonds is normally undertaken by a consortium of international banks. A record of the transaction called a “Tombstone” is subsequently published in the financial press. Those banks whose names appear at the top of the tombstone have agreed to subscribe to the issue. At a second level, a much larger underwriting syndicate is mentioned. The banks in the managing syndicate will have made arrangements with a worldwide group of underwriters, mainly banks and security dealers. After arranging the participation of a number of underwriters, the managing syndicate will have made a firm offer to the borrower, which obtains the funds from the loan immediately. At a third level, the underwriting group usually arranges for the sale of the issue through an even larger selling group of banks, brokers, and dealers.
Types of Eurobonds:
- Straight Bond: Bond is one having a specified interest coupon and a specified maturity date. Straight bonds may be issued with a floating rate of interest. Such bonds may have their interest rate fixed at six-month intervals of a stated margin over the LIBOR for deposits in the currency of the bond. So, in the case of a Eurodollar bond, the interest rate may be based upon LIBOR for Eurodollar deposits.
- Convertible Eurobond: The Eurobond is a bond having a specified interest coupon and maturity date. But, it includes an option for the hold to convert its bonds into an equity share of the company at a conversion price set at the time of issue.
- Medium-term Eurobond: Medium-term Euro notes are shorter-term Eurobonds with maturities ranging from three to eight years. Their issuing procedure is less formal than for large bonds. Interest rates on Euro notes can be fixed or variable. Medium-term Euro-notes are similar to medium-term roll-over Eurodollar credits. The difference is that in the Eurodollar market lenders hold a claim on a bank and not directly on the borrower.
Characteristics or Features of Eurobonds:
- Straight bonds: the fixed interest rate at periodic intervals, usually annually.
- Floating-rate notes (FRNs): rollover pricing payment usually six months interest stated in terms of a spread over some reference rate.
- Zero-coupon bonds: discount securities, sold either at a fraction of face value and redeemed at face value, or sold at face value and redeemed at a premium.
- Convertible bonds: can be exchanged for some other type of asset: stock, gold, oil, other bonds.
- Mortgage-backed Eurobonds: backed by a pool of mortgages, or other bonds Institutions which would otherwise be excluded from Eurobond market can get access.
- Dual-currency bonds: purchased in one currency, coupon or principal paid in a second currency.
The following Eurobonds features are:
- The issuing technique takes the form of a placing rather than formal issuing, this avoids national regulations on new issues.
- Eurobonds are placed simultaneously in many countries through syndicates of underwriting banks. Which sell them to their investment clientele throughout the world.
- Unlike foreign bonds, Eurobonds are sold in countries other than that of the currency of denomination; thus dollar-denominated Eurobonds are sold outside the U.S.A.
- The interest on Eurobonds is not subject to withholding tax.
Advantages of Eurobonds:
The advantages of Eurobonds to borrowers are:
- The size and depth of the market are such that it has the capacity to absorb large and frequent issues.
- The Eurobond market has a freedom and flexibility not found in domestic markets.
- The cost of issue of Eurobonds, around 2.5 percent of the face value of the issue.
- Maturities in the Eurobond market are suited to long-term funding requirements.
- A key feature of the Eurobond market is the development of a sound institutional framework for underwriting, distribution, and the placing of securities.
The advantages of Eurobonds to investors are:
- Eurobonds are issued in such a form that interest can be paid free of income or withholding taxes of the borrowing countries. Also, the bonds are issued in bearer form and are held outside the country of the investor, enabling the investor to evade domestic income tax.
- Issuers of Eurobonds have a good reputation for creditworthiness.
- A special advantage to borrowers as well as lenders is provided by convertible Eurobonds. Holders of convertible debentures are given an option to exchange their bonds at a fixed price.
- The Eurobond market is active both as a primary and as a secondary market.
Bonds denominated in a particular currency that are usually issued simultaneously in the capital markets of several nations. They differ from foreign bonds in that most nations do not have pre-offering registration or disclosure requirements for Eurobond issues. An Example of a Eurobond is a bond issued by a Russian corporation in the European market that pays interest and principal in U.S. dollars.