Eurobonds Like Other Bonds example essay topic

Welcome to the new generation of global currency exchange-Eurobonds. "Eurobonds are bonds sold outside the country in who currency it is denominated" (Investorwords. com). For example, a dollar denominated bond that is being sold in Japan would be considered a Eurobond. These futuristic multinational bonds are sold in a variety of packages and are extremely attractive to investors because "unlike any other major capital market, the Eurobond market remains largely unregulated and untaxed" (Shapiro 364), The Eurobond market commands a powerful figure of approximately $700 billion in global securities. These bonds, already a powerhouse of global monetary exchange, are quickly gaining popularity both in the general public and multinational corporations. There are a few different types of Eurobonds.

There is the fixed rate Eurobond, which would be used in purchasing a bond that would ordinarily pay coupon payments once a year. The fixed rate Eurobond offer a fixed payment stream based on the interest rate, and are applied until your principal is paid back to you. Alternatively, if you wanted to invest in a bond whose interest depended on some reference number you would choose a floating rate Eurobond. In a floating rate Eurobond, every three to six months, the bond is reset and the interest rate is changed, reflective of the new rate. With these bonds, the payments will vary depending on the reference rate that bond uses. Also, Eurobonds, like other bonds, can be convertible.

Convertible means that they can be converted into shares of the issuing company if certain conditions are met. Eurobonds are simple money making devices that if properly used, are surefire vehicles to perform for your pocket. Why would investors choose a Eurobond over any other type of security? As stated earlier, the Eurobond market is virtually unregulated, and a portion of Eurobonds is tax-free. This means that big borrowers can raise capital more quickly and flexibly than they can at home (Shapiro 364), while investors have the opportunity to generate greater gains without taxation. Eurobonds are not subject to the United States tax law; thus making them tax-free.

Eurobonds are issued in bearer form - they do not have to be registered with the SEC or any other regulatory body. This allows owners of Eurobonds enigmatic status, keeping there identities hidden from the rest of the world. As a result, owners of Eurobonds are able to collect interest without being taxed. In essence, these bonds pay interest without deduction of any withholding taxes.

There is a drawback though. Due to the tax-free feature of these bonds, investors are forced to accept lower yields as compared to other bonds with similar risk. Yet, the Eurobond market continues to grow due to the fact that it enables both investors and issuers to avoid government regulations and the payment of some taxes. For the issuer, in particular, Eurobonds are quite attractive because they can offer lower interest rates and reach a more diversified set of investors. Another benefit for issuers of Eurobonds is increased global exposure. As long as Eurobond issuance entails less government regulation and lower registration costs relative to the domestic bond market, the Eurobond market will continue to thrive.

A common way to evaluate the risks associated with bonds is through ratings. Ratings offered by Moody's and Standard and Poor's are basically the grade of the Eurobonds offered. They entail how good the bond is, and the credit worthiness of the issuer. Eurobond issues are also rated according to their relative degree of default risk associated with the issuer. The higher the rating, the more likely the investor is of receiving their principal, along with their interest payment stream in a timely fashion. Additionally, the rating determines the risk involved with purchasing corporate or government Eurobonds, and displays the possibility of the issuer defaulting on their debt.

There are two strategies that can be implemented in the retiring of Eurobond- a sinking fund or a purchase fund. Sinking funds or purchase funds are usually required for Eurobond issues whose maturities are greater than seven years. If an investor chooses to us a sinking fund, they are required to retire a fixed number of bonds annually, preceding a number of years. The other strategy is a purchase fund, often started in the first year, whereby bonds are tired only if the market price is below the issue price (Shapiro 363).

One would want to implement these funds so that the market price of the bond will become more stable. Also, the bondholder's risk would be decreased because the issuer's liabilities would not have to paid in full simultaneously. In addition, some Eurobonds come with call provisions attached. These allow the issuer to retire the bond at their discretion. This feature is advantageous to the issuer, allowing them to maintain interest rates that are competitive to the market. Another key reason for growth in the Eurobond market is due to the use of swaps.

A swap is "a financial transaction in which two counterparties agree to exchange streams of payment over time (according to specific terms) " (Shapiro 360). The most common type of swap used in the Eurobond market is the interest rate swap. This is when one party agrees to pay a fixed interest rate in return for receiving an adjustable rate from another party (Investorwords. com). For instance, take two borrowers. One owns a fixed rate Eurobond; the second owns a floating rate Eurobond. If beneficial to both parties, the two could exchange interest rated, resulting in what is known as an interest rate swap.

They would do this to take advantage of favorable currency movements, both benefiting from the arbitrage opportunities presented to them. Investing in Eurobonds in very similar to investing in domestic bonds, the biggest difference is in the lot sizes available for purchase. Typically, lot sizes for Eurobonds are significantly larger than those of domestic bonds. If interested in purchasing a bond issue, your investment adviser or broker will provide you with a prospectus that informs you of the entire bond are featured and risks, such as maturity, coupon rates, call ability, convertibility, etc. You are required to go through a broker to purchase Eurobonds; therefore you will be forced to pay commissions and fees, which will depend on the amount of service the broker provides.

Another possibility to acquire Eurobond is investing in a bond fund that focuses solely on Eurobonds. Even though you will be investing in Eurobonds indirectly, investing in bond funds is extremely convenient because you rely on a team of portfolio managers and analysts whose mission it is to see the fund succeed. The enormous amount of monies involved in Eurobond offerings can be staggering, as seen in the following example. General Motors Acceptance Corporation (GMAC) issued a two-part $2 billion global bond with 5- and 10-year maturities on January 24, 2002 along with a $3.3 billion (WSJ Online, March, 4 2002) convertible bond February 28 in the same year. For most companies this amount is unimaginable, but to industrial powerhouses like GMAC, this is the norm. GMAC passed these bonds to the public through different investment banks, including Barclays Capital, BNP Paribas, Credit Suisse First Boston, and Dresdner Klein wort Wasserstein, whom it hired to lead manage its bond offerings.

Issuers of Eurobonds may even hire a syndicate as large as one hundred or more investment banks will be able to lead manage offering, allowing them the opportunity to divide the risk up between different banks. Investment banks are essential to the bond market, bringing buyers and sellers together to make the sale of securities easier for both parties. Although the majority of Eurobonds are denominated in the U.S. dollars, more and more European companies are starting to issue Eurobonds on a regular basis. European interest in the global bond market has grown very quickly in recent years because the firms have realized that they can attract customers from all across the world.

The biggest difference between European and American companies is that, in the past, many different sized U.S. firms issued Eurobonds for global exposure and raising capital, while only large European companies were doing the same. However, according to an article from the Dow Jones Newswires, medium sized industrial companies are beginning to issue Eurobonds for the same reasons. "More medium-sized European industrial companies will enter the Eurobond market in the years ahead, but the shift away from bank financing will be gradual" (WSJ Online, Feb. 20). The medium sized companies generally used to go to banks in order to raise capital. The shift from using banks to issuing Eurobonds in medium sized industrial companies is evidence that more and more companies are not making banks their bedrock for raising capital, rather, they are relying on outside investors. As mid-size European firms realize the usefulness and ease of employing Eurobonds to acquire capital more effectively, the Eurobond market will continue to grow at an exponential rate.

So far, only positive elements of Eurobond have been discussed. However Eurobonds are not perfect, and depending on the location of issuance or place of purchase, some drawbacks may exist. In Europe, for example, the Eurobond market is being threatened by possible government deregulation, the provisions for private placement in the directive, and the role of the "home country" regulator in approving a prospectus. Government deregulation is detrimental to the Eurobond market in that it promotes domestic issuance of securities, rather than Eurobonds. This would inevitably lead to a larger proportion of market share being tied up in the domestic capital markets, as opposed to the worldwide exchange of securities. Opposing, if additional financial regulation were to take place in domestic capital markets, investor would be more likely to place there money in Eurobonds.

The European Union has attempted to provide issuers of securities with access to investors across the whole of Europe. The goal was to create a Pan-European capital market, whereby country borders would be eliminated. However, in practice, their legislation failed. The Lamfalussy Report was created in order to examine the effects of European financial integration. It stated that the main problem with this proposed legislation is that he same investment is considered private placement in some member countries, but not others. The other fault of this legislation is the home county approval procedure.

This clause states that the regulator in is the issuer's home country most approve an issuance of securities in order to be passed on to other jurisdictions. In effect, this adds another layer of regulation onto Eurobonds-bonds that should have no regulation at all (Preston). This legislation would effectively destroy the Eurobond market in Europe as it is known today. Eurobonds provide convenient, flexible, and fast paced offerings to the investment world, but are fairly complex. They are not meant for average investors or traders, but rather for multinational corporations or experienced and knowledgeable people.

Excess cash, education and experience are needed in order to profit from investing in the Eurobond market. Overall, Eurobonds can be very profitable sound investments, but you need to know how to play the game to win..