Your SlideShare is downloading. ×
International  bond market   hard copy
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Introducing the official SlideShare app

Stunning, full-screen experience for iPhone and Android

Text the download link to your phone

Standard text messaging rates apply

International bond market hard copy

763
views

Published on


0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
763
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
31
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Definition of 'Bond Market' The environment in which the issuance and trading of debt securities occurs. The bond market primarily includes government-issued securities and corporate debt securities, and facilitates the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions and ongoing operations. What is bond?The bond market (also known as the credit, or fixed income market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. Traditionally, the bond market was largely dominated by the United States, but today the US is about 44% of the market[1]. As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion,[2] of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to Bank for International Settlements (BIS), or alternatively $35.2 trillion as of Q2 2011 according to Securities Industry and Financial Markets Association (SIFMA).[2]Nearly all of the $822 billion average daily trading volume in the U.S. bond market[3] takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.References to the "bond market" usually refer to the government bond market, because of its size, liquidity, relative lack of credit risk and, therefore, sensitivity to interest rates.
  • 2. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. The yield curve is the measure of "cost of funding". Definition of 'International Bond' Debt investments that are issued in a country by a non-domestic entity. International bonds are issued in countries outside of the United States, in their native country's currency. They pay interest at specific intervals, and pay the principal amount back to the bond's buyer at maturity. International Bond:-A bond issued in a country or currency other than that of the investor or broker. They include Eurobonds, which are issued in a foreign currency, foreign bonds, which are issued by a foreign government or corporation in the domestic market, and global bonds, which are issued in both domestic and international markets. Unlike domestic bonds, international bonds are usually subject to currency risk. Caution is required when investing international bonds because they may be subject to different regulatory and taxation requirements than the ones with which the investor or broker is familiar. Investopedia explains 'International Bond':=International bonds include eurobonds, foreign bonds and global bonds. A different type of international bond is the Brady bond, which is issued in U.S. currency. Brady bonds are issued in order to help developing countries better manage their international debt. International bonds are also private corporate bonds issued by companies in foreign countries, and many mutual funds in the United States hold these bonds.
  • 3. INTERNATIONAL BOND IS FURTHER CLASSIFIED IN TWO TYPES A. Eurobond B. Foreign bond Definition of 'Eurobond'”-A bond issued in a currency other than the currency of the country or market in which it is issued. Usually, a eurobond is issued by an international syndicate and categorized according to the currency in which it is denominated. 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.Eurobonds are attractive financing tools as they give issuers the flexibility to choose the country in which to offer their bond according to the country's regulatory constraints. They may also denominate their eurobond in their preferred currency. Eurobonds are attractive to investors as they have small par values and high liquidity 'Foreign Bond':-A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency. A foreign bond is most often issued by a foreign firm to raise capital in a domestic market that would be most interested in purchasing the firm's debt. For foreign firms doing a large amount of business in the domestic market, issuing foreign bonds is a common practice. Types of foreign bonds include bulldog bonds, matilda bonds and samurai bonds.
  • 4. FEATURES OF INTERNATIONAL BOND  It is a fund raising market  It is debt market  Fixed income instrument  Issued in foreign currency THE PROCESS OF BRIGING A NEW INTERNATIONAL BOND TO THE MARKET Step 1:-A borrower will contact an investment banker ask it to serve as lead manager of an underwriting syndicate that will bring the bonds to market. Step 2:- The lead manager will usually invite other banks to form a managing group to help negotiate terms with the borrower, ascertain market conditions, and manage the issuance. Step 3:-The managing group, along with other banks, will serve as underwriters for the issue, i.e., they will commit their own capital to buy the issue from the borrower at a discount from the issue price. Step 4:-The various members of the underwriting syndicate receive a portion of the spread (usually in the range of 2 to2.5 percent of the issue size), depending upon the number and type of functions they perform. Step 5:-The lead manager receives the full spread, and a bank serving as only a member of the selling group receives a smaller portion.
  • 5. RISK OF INVESTING IN BOND 1. Inflation Risk 2. Interest rate Risk 3. Default Risk 4. Downgrade Risk 5. Liquidity Risk 6. Reinvestment Risk 7. Rip-off Risk ADVANTAGES & DISADVANTAGES OF INTERNATIONAL BOND ADVANTAGES :  Diversify your portfolio  International fund raising instrument  Fixed income market  Investment avenue(short term as well as long term Disadvantages:- Investing in international bond funds can help you diversify your portfolio. However, there are some potential drawbacks that you need to know about. Here are four disadvantages of investing in international bond funds.
  • 6. 1. Outperformed by Mutual Funds:-When you invest money into an indexed bond ETF, you are going to run the risk of being outperformed. Many actively managed mutual funds can outperform these types of funds. Therefore, you may not be choosing the best place to put your money. 2. Fees:-Many people that invest in these types of funds like to buy and sell shares frequently. When you do this, you are going to incur fees. These fees can significantly cut into the amount of return that is made from the international bond fund. 3. Risk:-By investing in this type of fund, you are taking on extra risk. You have to be aware of international market concerns as well as geopolitical and economic risks. 4. Limited SelectioN:-If you want to invest in international bond funds, you are going to find that you have a very limited selection to choose from. While there are hundreds of ETFs to choose from, those that specialize in international bond funds are a little more difficult to come by. INSTRUMENTS OF INTERNATIONAL BOND MARKET FIXED RATE BONDS (71% of market in 2003) - Fixed maturity date (long term), fixed coupon rate (% of face value), issued in £, €, ¥, or $. Interest only bonds (non-amortizing). Coupon pmts are usually made annually, not semi-annually as for most domestic bonds, more convenient for bondholder, less costly for issuer (bondholders are scattered). Eurobonds are bearer bonds and owners hold a physical bond certificate. How does bearer receive interest pmts? Owner clips bond coupons and presents to bank for annual payment.
  • 7. FLOATING-RATE NOTES (FRN), 26% of Market- Started in 1970. Usually medium term (1-10 year) bonds with a quarterly or semi-annual floating/variable coupon rate, like an ARM, issued mostly in $ and €. Indexed to some reference interest rate like 6 month LIBOR (CH 11). Semi-annual pmt (reset at the beginning of each 6 month period) would be .50 ( LIBOR + Risk Premium) of face value, risk premium usually 1/8 percent (.125%) for firm's with very good credit rating. Example: Rate is: LIBOR + .125%, and LIBOR = 6.6%. Semi-annual coupon pmts for every $1000 face value would be: .50 (6.6% + .125%) ($1000) = $33.625. In six months if LIBOR is 5.7%, the payment would be: .50 (5.7% + .125%) ($1000) = $29.125. Advantage of FRNs - compared to fixed rate bonds, very little interest rate risk (capital or price risk), i.e., the price of the bond will fluctuate between reset dates, but will adjust back to par ($1000) after the quarterly or semi-annual reset date. Why might the FRN not sell at par, even at the reset date?? Example: National Bank of Kuwait issued $450m of 3-year FRNs in 2002, indexed to LIBOR + 25 bp (1/4%). EQUITY-RELATED BONDS (3% Market) Bonds with Warrants - Fixed rate bond with call options (warrants) on the company's stock. The warrant allows the bondholder to buy a certain number of equity shares at a predetermined price on or before a fixed date. Why issue? When would you exercise?
  • 8. ZERO COUPON BONDS - Bonds that do not pay interest over their life. Sold at a deep discount off face value ($1000), with one payment only, at maturity. Advantages? Company can borrow money, have no debt payments. It can actually deduct interest as a taxable expense. Investors avoid reinvestment rate risk (fixed duration). In countries like Japan (and Europe) with no long term capital gains tax, zero coupons have a tax advantage over coupon bonds. Coupon payments are taxable as interest income, but the long-term capital gain (Face Value - Price) is non-taxable. Example: 10-year zero coupon DM bonds, sold at 50% of face value, 15-year zero coupon DM bonds sold at 33 1/3% of face value. YTM: _______ for 10 year, _________ for 15 year. DUAL-CURRENCY BONDS :-Started in mid-80s. Fixed rate coupon pmts are made in one currency (SF or ¥), maturity value (principal) is paid in another currency ($). The $ maturity value is fixed, so a dual-currency bond includes a long term forward contract. If dollar appreciates (depreciates), the value of the bond rises (falls). Dual-currency bonds are riskier for investors, so the yield (coupon rate) is higher. Japanese MNCs have issued Yen/$ dual currency bonds, coupons paid in Yen, principal paid in $, to finance FDI in U.S. Example: Honda might issue dual currency Yen/Dollar bonds to expand or establish factory in U.S. Longterm investment, may not be profitable for 10 years. The loan can be serviced in Yen from Japan, and the principal can be paid with long-term dollar profits earned in the U.S. bond instruments and currency distribution: $ and € bonds account for 84% of the market. € has grown in importance, SF and C$ have declined.
  • 9. WHAT IS EUROBOND ? (1) Underwritten by an international syndicate, (2) Offered at issuance simultaneously to investors in a number of countries (3) Issued outside the jurisdiction of any single country. Definition of 'Eurobond'”-A bond issued in a currency other than the currency of the country or market in which it is issued. Investopedia explains 'Eurobond':-Usually, a eurobond is issued by an international syndicate and categorized according to the currency in which it is denominated. 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.Eurobonds are attractive financing tools as they give issuers the flexibility to choose the country in which to offer their bond according to the country's regulatory constraints. They may also denominate their eurobond in their preferred currency. Eurobonds are attractive to investors as they have small par values and high liquidity. Examples of eurobonds.1) Wal-Mart issues bonds denominated in U.S. dollars on the German financial markets.2. The French government issues euro-denominated bonds on the Japanese financial markets. The Procedures for the Eurobond Issuance Process:Select a Lead Manager:-Eurobonds are issued by underwriting syndicates. These syndicates are made up of investment and merchant banks and may be formed in different ways. Generally, the borrower chooses one investment bank to be the lead manager of the bond issue. The lead manager then
  • 10. negotiates with other banks to form the syndicate. Borrowers may also use existing syndicates or ask a particular investment banker to act as lead manager. Organize a Syndicate:-The lead manager negotiates with other banks to form a managing group. This group then negotiates the terms of the bond issue with the borrower. Members of the managing group will also form another group to act as underwriters in the bond issue. The underwriters will commit their own money to buy the bond issue from the borrower -- at a set minimum price. They then sell the bonds on to secondary markets at an agreed profit. The managing group will also negotiate with other banks to form a selling group -- this is the group of banks that will actually sell the bonds to investors. Selling the Bonds:-Once the syndicate is formed and the terms of the issue are agreed upon, the managing group buys the bonds from the borrower. The managing group then sells the eurobonds to the underwriters, and the underwriters sell the bonds to the selling group. The banks that make up the selling group then sell the bonds on to investors. One thing to keep in mind is that although there are several roles -- managers, underwriters and sellers -- these roles usually overlap, so that managers may also be underwriters and sellers. Principal Paying Agent:-A principal agent is chosen. This is the bank that is responsible for receiving interest payments from the borrower and passing them on to the investors who buy the bonds. A fiscal agent or trustee may also be appointed by the borrower to handle the paperwork and legal aspects of the eurobond issue and act as principal agent. The trustee will also represent the purchasers of the bond if the borrower defaults. Trustees and fiscal agents are generally banks, and not individuals.
  • 11. UNIQUE CHARACTERISTICS OF EUROBOND 1 FACE VALUE/ PAR VALUE: The face value isthe amount of money a holder will get back,once a bond matures. ‡ 2) COUPON (THE INTEREST RATE):The couponis the amount the bondholder will receive asinterest payments. It s called coupon becausein early days there were physical couponsattached to the bond certificate 3) MATURITY: It is the date in the future onwhich the investor s principal will be repaid. ‡ 4) ISSUER: Eurobonds are mostly issued bycorporate ‡ 5) DENOMINATIONS: various currencies arecommonly used the US $ is used the most,denominating 70-75 % of Eurobonds. 6 SECONDARY MARKET: Eurobonds have asecondary market which is different fromcommon stock market/exchange. ‡ 7) RATINGS: The bond rating system helpsinvestors determine a company s credit risk. ‡ 8 TAXATION: Eurobonds are not subject to taxlargely free from government regulation.
  • 12. ADVANTAGES & DIS ADVANTAGES FOR COMPANIES TO ISSUE EUROBONDS There are several advantages for companies to issue Eurobonds:      Large amounts Freedom and Flexibility Lower cost of issue Lower interest cost Longer maturities Against these advantages, there are some disadvantages to consider:   there are issue costs to take into account if the debt is not matched against a foreign currency asset, the Eurobond issuing firm may be open to foreign exchange risk.  ADVANTAGES & DISADVANTAGES FOR INVESTOR TO ISSUE EUROBONDS There are several benefits to an investor who does put its money into Eurobonds”:     Tax free income Low Risk investment Convertible to Equity Liquid investment
  • 13. As for disadvantages to the investor:   Investing in a Eurobond is not a good idea for investors who may need a repayment of the investment at short notice. There is always the risk of the issuing company going under and the maturity value of the Eurobond not being paid. Definition of 'Foreign Bond':-A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency. A foreign bond is most often issued by a foreign firm to raise capital in a domestic market that would be most interested in purchasing the firm's debt. For foreign firms doing a large amount of business in the domestic market, issuing foreign bonds is a common practice. Types of foreign bonds include bulldog bonds, matilda bonds and samurai bonds. Investopedia explains 'Foreign Bond':-Foreign bonds are regulated by the domestic market authorities and are usually given nicknames that refer to the domestic market in which they are being offered. Since investors in foreign bonds are usually the residents of the domestic country, investors find them attractive because they can add foreign content to their portfolios, without the added exchange rate exposure. A debt security issued by a borrower from outside the country in whose currency the bond is denominated and in which the bond is sold. A bond denominated in U.S. dollars that is issued in the United States by the government of Canada is a foreign bond. A foreign bond allows an investor a measure of international diversification without subjection to the risk of changes in relative currency values.
  • 14. Three characteristics of foreign bonds A foreign bond has three distinct characteristics:    The bond is issued by a foreign entity (such as a government, municipality or corporation) The bond is traded on a foreign financial market The bond is denominated in a foreign currency. Bond markets Bond markets in India have witnessed a sea change since the early 1990s. The government securities market has practically emerged since the mid-1990s. Trading platforms and settlement mechanisms have improved and new instruments have been experimented with, with varying degrees of success. In comparison, with practically no new primary market issuance of corporate bonds (except in the private placement segment), the current state of the corporate bond market in India is till nascent although in the last 2-3 years it has witnessed significant reform activities. The package of regulatory and infrastructural changes recommended by the Patil committee in 2005, partly implemented already, is likely to increase the primary and secondary market activity.The market for asset securitization in India is relatively small but has demonstrated significant growth in recent years. Asset-backed securities have led the market with mortgagebacked securities lagging. Corporate loan securitization is also considerable but mostly in the form of single loan sell-offs rather than pools of loans as in Collateralized Debt Obligations (CDOs) as securities. Securitization of trade credit or receivables is yet to develop.
  • 15. Bonds are debt securities in which an investor purchases a bond from a government or a corporation and holds that bond until it comes due. At that time, the issuer of the bond will pay the interest earned by the bond in full. In India, there are several types of bonds available to investors, including ones that are only sold privately and a tax-savings bond that releases the investor of a tax burden. DEFINITION : Bonds issued and traded within the internal market of a country and denominated in the currency of that country. Bonds issued in the country and currency in which they are traded. Unlike international bonds, domestic bonds are not subject to currency risk. They usually carry less risk, as the regulatory and taxation requirements are usually known to investors in domestic bonds, or at least to their brokers and accountants. Public Sector Undertaking Bonds o If you're looking for a medium- to long-term investment in the Indian bond market, a Public Sector Undertaking bond can be a good choice. PSUs are issued and backed by the government of India, but they're usually sold on a private basis. In other words, the Indian government targets investors themselves and offers the bonds to these investors at fixed rates. An investment banker usually only serves as a middleman in this situation.
  • 16. Corporate Bonds o These are more traditional bond instruments, which are offered by private corporations in India for terms that can last up to 15 years. Unlike the government bonds mentioned earlier, anyone can purchase a corporate bond. However, there is a higher risk of default and that can depend upon the corporation backing the bond, market conditions, the company's industry and its investment rating. But the risk comes with a higher return on the investment. Financial Institutions and Banks o Bonds issued by financial institutions and banks in India are a vibrant financial instrument and make up more than 80 percent of the bond market in that country. The reasons are simple. Bonds issued by financial institutions and banks are regulated well and come with good bond ratings. Large-scale investors are some of the most important investors in this category. Emerging Markets Bonds o These bonds, issued by the Indian government, are issued abroad as hard currency to raise capital for economic development in third-world countries. What's different about these bonds is that they are usually issued in U.S. dollars or the Euro, which can make them more attractive to investors in those countries. Also making these EM bonds attractive is the interest rate, which while high is typically paid by the issuer. The risk comes in that countries like India have a lower
  • 17. credit rating and the success of the bonds is tied to the success of the country's economic development. Tax-Savings Bonds o The Indian government issues special bonds that allow its citizens to be either partially or fully released from paying taxes. Most of them are issued by India's Reserve Bank. These five-year bonds are sold at an interest rate of 6.5 percent and interest is paid off every half-year. The upside for the investor is that by purchasing this bond, they are released from paying taxes on the related interest income, as long as they hold the bond until it matures.