International Bond Market

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  • 1. The International Banking & Money Market PART I
  • 2. The International Bond Market
  • 3. Corporate Sources & Uses of Funds Short & Medium Term Bank loans Publicly or Privately placed Bonds SOURCES OF FUNDS Internally Generated Cash Short-term External Funds Long-term External Funds
  • 4. International Financial Markets
    • Markets where foreigners can both borrow and lend money
    • Important international financial centers are London, Tokyo and New York
    • Important financial entrepots or channels are Switzerland, Luxembourg, Singapore, Hong Kong, the Bahamas and Bahrain
  • 5. The Eurocurrency Market
    • A Eurocurrency is a dollar or other freely convertible currency deposited in a bank outside its country of origin
    • E.g. US dollars on deposit in London become Eurodollars
  • 6. The Eurobond Market
    • Eurobonds are bonds sold outside the countries in whose currencies they are denominated
    • Eurobonds are similar in many respects to the public debt sold in domestic capital markets
  • 7. The International Bond Market
    • The bond market is a financial market where participants buy and sell debt securities , usually in the form of bonds
    • As of 2009, the size of the worldwide bond market is an estimated $82.2 trillion , of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to BIS
  • 8. The International Bond Market
    • Participants include:
      • Financial Institutions
      • Governments
      • International Organisations
      • Corporate Issuers
  • 9. The International Bond Market
    • The international bond market encompasses two
    • market segments:
    • 1. Foreign Bonds
    • 2. Eurobonds
  • 10. Foreign Bonds
    • A foreign bond is one offered by a foreign borrower to the investors in a national capital market and denominated in the nation’s currency
    • Example: A German MNC issuing dollar-denominated bonds to U.S. investors
  • 11. Eurobonds
    • A Eurobond issue is one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency
    • Example: A Dutch borrower issuing dollar-denominated bonds to investors in the U.K., Switzerland, and the Netherlands
  • 12. Bond Markets
    • The markets for foreign bonds and Eurobonds operate in parallel with the domestic national bonds market and all the three compete with one another
    • Eurobonds are known by the currency in which they are denominated e.g. Eurodollar bonds, Euroyen bonds, EuroSF bonds etc.
  • 13. Bond Markets
    • Sometimes they have colourful names like Yankee bonds ( U.S. dollar), Samurai bonds (JPY), Bulldogs (Stg. Pound)
    • About 80 percent issues are Eurobonds issues
    • Eurobonds are usually bearer bonds
  • 14. Bond Markets
    • Global Bonds:
    • A global bond issue is a very large international bond offerings by a single borrower that is simultaneously sold in North America, Europe and Asia
    • The issues were first offered in 1989
  • 15. International Bonds- Types of Instruments
    • Straight Fixed-Rate Issues:
    • Principal payable on maturity; coupon payments on annual basis
  • 16. International Bonds- Types of Instruments
    • Euro-Medium-Term Notes (Euro-MTNs):
    • Fixed rate notes with maturities from less than a year to about ten years
    • Euro MTN issue is partially sold on a continuous basis
  • 17. International Bonds- Types of Instruments
    • Floating Rate Notes (FRNs):
    • Medium-term bonds with coupon payments indexed to some reference rate (e.g. 3 month LIBOR)
    • Coupon payments are usually quarterly or semiannual
  • 18. International Bonds- Types of Instruments
    • Equity-Related Bonds:
    • 1. Convertible Bond:
    • - allows the investor to exchange the bond for a predetermined number of equity shares of the issuer
  • 19. International Bonds- Types of Instruments
    • Equity-Related Bonds:
    • 2. Bonds with equity warrants:
    • - a straight fixed-rate bond with the addition of a call option (warrant) feature. The warrant entitles purchase of certain number of equity shares at a prestated price
  • 20. International Bonds- Types of Instruments
    • Zero-Coupon Bonds:
    • Zero- coupon bonds are sold at a discount from face value and do not pay any coupon over their life
  • 21. International Bonds- Types of Instruments
    • Zero-Coupon Bonds:
    • Another form of zero-coupon bonds are stripped bonds
    • A stripped bond is a zero-coupon bond that results from stripping the coupons and principal from a coupon bond (e.g. US Treasury STRIPS)
  • 22. International Bonds- Types of Instruments
    • Dual-Currency Bonds:
    • A dual-currency bond is a straight fixed-rate bond issued in one currency, say, euro, that pays coupon in the same currency
    • At maturity, the principal is repaid in another currency, say, US dollars
  • 23. Characteristics of International Bond Market Instruments Dual currency Fixed Annual Dual-currency bond Currency of issue Zero None Zero-coupon bond Currency of issue plus equity shares from exercised warrants Fixed Annual Straight fixed-rate with equity warrants Currency of issue or conversion to equity shares Fixed Annual Convertible bond Currency of issue Variable Quarterly Or semi-annual Floating-rate note Currency of issue Fixed Annual Straight fixed-rate Payoff at Maturity Size of Int. payment Frequency of Int. payment Instrument
  • 24. Eurobond Market Structure
    • Primary Market:
    • A borrower desiring to raise funds by issuing Eurobonds to investors contacts an investment banker
  • 25. Eurobond Market Structure
    • Secondary Market:
    • Eurobonds initially purchased in the primary market may be resold prior to their maturity in the secondary market
    • It is an over-the-counter market with principal trading in London and some other centers such as Zurich, Luxembourg, Frankfurt and Amsterdam
  • 26. Advantages of the Eurobond Markets
    • To Borrowers:
    • Size and depth of the market are large
    • Freedom and flexibility not found in domestic markets
    • Relatively low costs ( around 2.5%)
    • Interest costs are competitive ( especially dollar Eurobonds)
    • Long maturity periods suitable for long-term funding ( 30 years)
    • Sound institutional framework for underwriting, distribution and placement of securities
  • 27. Advantages of the Eurobond Markets
    • To Investors:
    • Interest can be paid free of income tax
    • Issuers are of high credit standing : government, international organisations or MNCs
    • Convertible Eurobonds – value addition
    • Rated instruments
  • 28. International Bond Amounts Outstanding by Major Instruments Billions of US Dollars 25670.8 26078.6 22717.1 Total 446.1 447.2 396.7 Straight fixed-rate with equity warrants 7988.8 8357.2 7892.0 Floating-rate note 17235.9 17274.2 14428.4 Straight fixed-rate Instrument March 2010 Dec. 2009 Dec. 2008
  • 29. International Bond Amounts Outstanding by Major Issuers Billions of US Dollars 25670.80 26078.50 22717.20 Total 3,071.20 3,024.70 2,359.00 Corporate Issuers 814.10 791.50 637.90 International Organisations 2,254.40 2,232.20 1,794.60 Governments 19,531.10 20,030.10 17,925.70 Financial Institutions March 2010 Dec. 2009 Dec. 2008
  • 30. International Bond Amounts Outstanding by Major Currencies Billions of US Dollars 25670.8 26078.5 22717.2 Total 1441.9 1422.5 1179.7 Other 668.7 693.9 746.7 Yen 2028.3 2145.5 1701.8 Pound Sterling 9718.1 9429.0 8215.1 US Dollar 11813.8 12387.6 10873.9 Euro March 2010 Dec. 2009 Dec. 2008
  • 31.
    • Thank you