Ifm global bond mkt

  • 236 views
Uploaded on

 

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
236
On Slideshare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
4
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. International Bond Market 12 Chapter Twelve INTERNATIONAL INTERNATIONAL FINANCIAL Chapter Objective: FINANCIAL MANAGEMENT MANAGEMENT This chapter continues discussion of international capital markets with a discussion of the structure of Fourth Edition Fourth Edition the international bond market. EUN / RESNICK EUN / RESNICK 12-0 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-1 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The World’s Bond Markets: Chapter Outline A Statistical Perspective:l The World’s Bond Markets: A Statistical l The total market value of the world’s bond Perspective markets are about 50% larger than the world’sl Foreign Bonds and Eurobonds equity markets.l Types of Instruments l Most issues are denominated in U.S. dollars, eurol Currency Distribution, Nationality, Type of Issuer and Japanese yen.l International Bond Market Credit Ratingsl Eurobond Market Structure & Practicesl International Bond Market Indices 12-2 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-3 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Amounts of Domestic and International A Statistical Perspective: Bonds Outstanding Currency (U.S. $ billions) Percent Currency Domestic International Total U.S. dollar $17,930.7 $ 4,492.5 $ 22,423.2 U.S. Dollar 22,423.2 43.6 Euro $ 8,436.4 $ 4,834.5 $ 13,270.9 Euro 13,270.9 25.8 Pound $ 1,274.6 $ 778.7 $ 2,053.3 Yen 8,633.6 16.8 Yen $ 8,145.0 $ 488.6 $ 8,633.6 Other $ 4,506.6 $ 508.2 $ 5,014.8 Other 7,068.1 13.8 Total $40,293.3 $ 11,102.5 $ 51,395.8 Total 51,395.8 100 (As of Year-End 2004 in U.S. $Billions) 12-4 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-5 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 1
  • 2. Amounts of Domestic and International Domestic and International Bonds Bonds Outstanding Outstanding 50.0% $50,000.0 45.0% 40.0% $40,000.0 35.0% Domestic 30.0% Domestic $30,000.0 International 25.0% International $20,000.0 Total 20.0% Total 15.0% $10,000.0 10.0% 5.0% $- 0.0% U.S. Euro Pound Yen Other Total U.S. Euro Pound Yen Other dollar (As of Year-End 2004 in U.S. $Billions) dollar (As of Year-End 2004 in U.S. $Billions) 12-6 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-7 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Bearer Bonds and Foreign Bonds and Eurobonds Registered Bondsl Bearer Bonds and Registered Bonds l Bearer Bonds are bonds with no registered owner.l National Security Registrations As such they offer anonymity but they also offer the same risk of loss as currency.l Withholding Taxes l Registered Bonds: the owners name is registeredl Recent Regulatory Changes with the issuer.l Global Bonds l U.S. security laws require Yankee bonds sold to U.S. citizens to be registered. 12-8 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-9 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. National Security Registrations Withholding Taxesl Yankee bonds must meet the requirements of the l Prior to 1984, the United States required a 30 SEC, just like U.S. domestic bonds. percent withholding tax on interest paid tol Many borrowers find this level of regulation nonresidents who held U.S. government or U.S. burdensome and prefer to raise U.S. dollars in the corporate bonds. Eurobond market. l The repeal of this tax led to a substantial shift inl Eurobonds sold in the primary market in the the relative yields on U.S. government and United States may not be sold to U.S. citizens. Eurodollar bonds.l Of course, a U.S. citizen could buy a Eurobond on l This lends credence to the notion that market the secondary market. participants react to tax code changes. 12-10 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-11 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 2
  • 3. Recent Regulatory Changes Global Bondsl Shelf Registration (SEC Rule 415) l A global bond is a very large international bond n Allows the issuer to preregister a securities issue, and offering by a single borrower that is then offer the securities when the financing is actually simultaneously sold in North America, Europe needed. and Asia.l SEC Rule 144A l Global bonds denominated in U.S. dollars and n Allows qualified institutional investors to trade private issued by U.S. corporations trade as Eurobonds placements. overseas and domestic bonds in the U.S. n These issues do not have to meet the strict information disclosure requirements of publicly traded issues. 12-12 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-13 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Instruments Straight Fixed Rate Debtl Straight Fixed Rate Debt l These are “plain vanilla” bonds with a specifiedl Floating-Rate Notes coupon rate and maturity and no options attached.l Equity-Related Bonds l Since most Eurobonds are bearer bonds, coupon dates tend to be annual rather than semi-annual.l Zero Coupon Bonds l The vast majority of new international bondl Dual-Currency Bonds offerings are straight fixed-rate issues.l Composite Currency Bonds 12-14 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-15 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Floating-Rate Notes Equity-Related Bondsl Just like an adjustable rate mortgage. l Convertiblesl Common reference rates are 3-month and 6-month n Convertible bonds allow the holder to surrender his U.S. dollar LIBOR bond in exchange for a specified number of shares in the firm of the issuer.l Since FRN reset every 6 or 12 months, the l Bonds with equity warrants premium or discount is usually quite small n These bonds allow the holder to keep his bond but still buy a specified number of shares in the firm of the …as long as there is no change in the default risk. issuer at a specified price. 12-16 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-17 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 3
  • 4. Zero Coupon Bonds Dual-Currency Bondsl Zeros are sold at a large discount from face value l A straight fixed-rate bond, with because there is no cash flow until maturity. interest paid in one currency, andl In the U.S., investors in zeros owe taxes on the principal in another currency. “imputed income” represented by the increase in l Japanese firms have been big issuers with coupons present value each year, while in Japan, the gain is in yen and principal in dollars. a tax-free capital gain. l Good option for a MNC financing a foreignl Pricing is very straightforward: subsidiary. PAR PV = (1 + r) T 12-18 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-19 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Characteristics of International Bond Composite Currency Bonds Market Instrumentsl Denominated in a currency basket, like the SDRs Instrument Frequency of Size of Payoff at Payment Coupon Maturity or ECUs instead of a single currency. Straight Fixed-Ratel Often called currency cocktail bonds. Annual Fixed Currency of issue Floating Rate Note Every 3 or 6 months Variable Currency of issuel Typically straight fixed rate debt. Convertible Bond Annual Fixed Currency of issue or conversion to equity shares. Straight fixed rate Annual Fixed Currency of issue with equity plus conversion to warrants equity shares. Zero none zero Currency of issue Dual Currency Annual Fixed Dual currency Bond 12-20 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-21 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Currency Distribution of Distribution of International Bond International Bond Offerings Offerings by Nationality Nationality 2003 Currency 2003 Australia 162 U.S. dollar 51% Canada 267.2 Euro 32 France 700.8 Yen 6 Germany 1,810.3 Pound Sterling 7 Italy 510.5 Swiss franc 2 Japan 255.5 Other 2 Netherlands 532.8 Total 100 United Kingdom 1,032.1 United States 3,011.8(As of Year-End 2003 in U.S. $Billions) U.S. $B Total 11,102.5 12-22 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-23 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 4
  • 5. Distribution of International Bond International Bond Market Offerings by Type of Issuer Credit Ratings Type of Issuer 2003 l Fitch IBCA, Moody’s and Standard & Poor’s sell credit rating analysis. Governments 1,122.3 l Focus on default risk, not exchange rate risk. Financial Institutions 8,032.5 l Assessing sovereign debt focuses on political Corporate issuers 1,446.6 risk and economic risk. International 501.1 organizations Total 11,102.5(As of Year-End 2003 in U.S. $Billions) 12-24 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-25 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Eurobond Market Structure International Bond Market Indicesl Primary Market l There are several international bond market n Very similar to U.S. underwriting. indices.l Secondary Market l J.P. Morgan and Company n OTC market centered in London. n Domestic Bond Indices uComprised of market makers as well as brokers. n International Government bond index for 18 countries. uMarket makers and brokers are members of the International n Widely referenced and often used as a benchmark. Securities Market Association (ISMA). n Appears daily in The Wall Street Journall Clearing Procedures n Euroclear and Cedel handle most Eurobond trades. 12-26 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-27 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. End Chapter Twelve INTERNATIONAL FINANCIAL MANAGEMENT Fourth Edition EUN / RESNICK 12-28 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-29 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 5
  • 6. International Equity Chapter Outline Markets 13 Chapter Thirteen l A Statistical Perspective INTERNATIONAL l n Market Capitalization of Developed Countries Market Structure, Trading Practices, and Costs Chapter Objective: FINANCIAL l n Market Capitalization of Developing Countries International Equity Market Benchmarks n Measures of Liquidity MANAGEMENT l inShares MSCI Measures of Market Concentration This chapter discusses both the primary and TradingStructure, Trading Practices, and Costs l l Market in International Equities secondary equity markets throughout the world. l n Magnitude of International Equity Trading Factors Affecting International Equity Returns Fourth Edition l International Equity Market Benchmarks n Cross-Listing of Shares EUN / RESNICK l inShares MSCI Offerings Yankee Stock l Trading in International Equities n The European Stock Market l n American Depository Receipts Factors Affecting International Equity Returns 12-30 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-31 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Market Capitalization of Developed A Statistical Perspective Countriesl Market Capitalization of Developed Countries l Almost 90% of the total market capitalization ofl Market Capitalization of Developing Countries the world’s equity markets is accounted for by the market capitalization of the developed world.l Measures of Liquidityl Measures of Market Concentration 12-32 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-33 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Market Capitalization of Measures of Liquidity Developing Countriesl The other 10% is accounted for by the market l The equity markets of the developed world tend to capitalization of developing countries in be much more liquid than emerging markets. “emerging markets”. n Liquidity refers to how quickly an asset can be sold n Latin America without a major price concession. n Asia l So, while investments in emerging markets may n Eastern Europe be profitable, the focus should be on the long n Mideast/Africa term.l Recently the growth rates in these emerging markets have been strong, but with more volatility than we have here at home. 12-34 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-35 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 6
  • 7. Market Structure, Measures of Market Concentration Trading Practices, and Costsl Emerging Markets tend to be much more l Primary Markets concentrated than our markets. n Shares offered for sale directly from the issuing n Concentrated in relatively few companies. company.l That is, a few issues account for a much larger l Secondary Markets percentage of the overall market capitalization in n Provide market participants with marketability and emerging markets than in the equity markets of share valuation. the developed world. 12-36 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-37 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Market Structure, Market Structure, Trading Practices, and Costs Trading Practices, and Costsl Market Order l Dealer Market n An order to your broker to buy or sell share n The stock is sold by dealers, who stand ready to buy immediately at the market price. and sell the security for their own account. n In the U.S., the OTC market is a dealer market.l Limit Order l Auction Market n An order to your broker to buy or sell at the at a price n Organized exchanges have specialists who match buy you want, when and if he can. and sell orders. Buy and sell orders may get matchedl If immediate execution is more important than the without the specialist buying and selling as a dealer. price, use a market order. l Automated Exchanges n Computers match buy and sell orders. 12-38 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-39 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. International Equity Market North American Equity Market Benchmarks Benchmarksl North Americal Europe NAME SYMBOL Dow Jones Industrial Average DJIAl Asia/Pacific Rim NASDAQ Combined CCMP Composite S&P 500 SPX TSE 300 TS300 Mexico BOLSA Index MEXBOL 12-40 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-41 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 7
  • 8. Asia/ Pacific Rim Equity MarketEuropean Equity Market Benchmarks Benchmarks NAME SYMBOL NAME SYMBOL FT-SE 100 UKX NIKKEI 225 Index NKY CAC 40 CAC Hang Seng Index HSI Frankfurt DAX Index DAX STI Sing Straits Times Index IBEX Index IBEX ASX All Ordinaries Index AS300 Milan MIB30 MIB30 BEL20 Index BEL20 12-42 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-43 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. i Shares MSCI Trading in International Equitiesl Country-specific baskets of stocks designed to l Magnitude of International Equity Trading replicate the country indexes of 21 countries. l Cross-Listing of Sharesl i Shares are exchange traded funds that trade on l Yankee Stock Offerings the American Stock Exchange and are subject to l The European Stock Market U.S. SEC and IRS diversification requirements. l American Depository Receipts n Low cost, convenient way for investors to hold diversified investments in several different countries. 12-44 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-45 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Magnitude of International Cross-Listing of Shares Equity Tradingl During the 1980s world capital markets began a l Cross-Listing refers to a firm having its equity trend toward greater global integration. shares listed on one or more foreign exchanges.l Diversification, reduced regulation, improvements l The number of firms doing this has exploded in in computer and communications technology, recent years. increased demand from MNCs for global issuance. 12-46 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-47 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 8
  • 9. Advantages of Cross-Listing Yankee Stock Offeringsl It expands the investor base for a firm. l The direct sale of new equity capital to U.S. n Very important reason for firms from emerging market public investors by foreign firms. countries with limited capital markets. n Privatization in South America and Eastern Europel Establishes name recognition for the firm in new n Equity sales by Mexican firms trying to cash in on capital markets, paving the way for new issues. NAFTAl May offer marketing advantages.l May mitigate possibility of hostile takeovers. 12-48 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-49 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The European Stock Market American Depository Receiptsl There is not as yet a single European stock market l Foreign stocks often trade on U.S. exchanges as that comprises all national markets. ADRs.l A lack of common securities regulations, even l It is a receipt that represents the number of foreign among the countries of the European Union, is shares that are deposited at a U.S. bank. hindering this development. l The bank serves as a transfer agent for the ADRs 12-50 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-51 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. American Depository Receipts Volvo ADRl There are many advantages to trading ADRs as l A good example of a familiar firm that trades in a opposed to direct investment in the company’s U.S. as an ADR is Volvo AB, the Swedish car shares: maker. n ADRs are denominated in U.S. dollars, trade on U.S. l Volvo trades in the U.S. on the NASDAQ under exchanges and can be bought through any broker. the ticker VOLVY. n Dividends are paid in U.S. dollars. n The depository institution is JPMorgan ADR Group. n Most underlying stocks are bearer securities, the ADRs n The custodian is a Swedish firm, S E Banken Custody. are registered. l Of course, Volvo also trades on the Stockholm Stock Exchange under the ticker VOLVB. 12-52 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-53 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 9
  • 10. Factors Affecting Global Registered Shares International Equity Returnsl DaimlerChrysler AG is a German firm, whose l Macroeconomic Factors stock trades as a GRS. l Exchange Ratesl GRS are one share traded globally, unlike ADRs, l Industrial Structure which are receipts for banks’ deposits of home- market shares and traded on foreign markets.l They trade in both dollars and euros.l All shareholders have equal status and voting rights. 12-54 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-55 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomic Factors Affecting Exchange Rates International Equity Returnsl The data do not support the notion that equity l Exchange rate movements in a given country returns are strongly influenced by macro factors. appear to reinforce the stock market movementsl That is correspondent with findings for U.S. within that country. equity markets. l One should be careful not to confuse correlation with causality. 12-56 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-57 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Industrial Structure End Chapter Thirteenl Studies examining the influence of industrial structure on foreign equity returns are inconclusive. 12-58 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 12-59 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 10