This document summarizes various international financial market instruments used to raise funds, including equities, bonds, and short-term instruments. International equities, also called Euro-equities, are foreign portfolio equity investments that provide dividends but no voting rights. International bonds include foreign bonds denominated in the currency of the foreign country and Eurobonds denominated in a non-domestic currency. Short-term instruments include Euro notes, Euro commercial papers, and medium-term Euro notes that provide short-term funding over periods of 3 months to 7 years. These various instruments provide benefits to both issuers and investors in accessing international capital markets.
2. Funds are raised from international financial market also
through the sale of securities.
International equities or Euro-equities
International bonds
Short-term and Medium-term instruments
3. International Equities or Euro-equities
Neither represent debt nor FDI
New instrument representing foreign portfolio equity
investment.
Gets dividend but does not have voting right
Compromise between debt and FDI
4. Benefits to the Issuer/Invester
Issuer
1. When the domestic market is already flooded with its shares,
company does not like to add further stress on domestic market.
2. The presence of restrictions on the issue of shares in the domestic
market facilitates the issue of Euro-equities
3. International recognition
4. Foreign exchange( vital for a firm in developing country)
5. international capital is available at lower cost
6. Funds raised do not add to the foreign exchange exposure.
5. International Bonds
• Debt instruments
• Issued by international agencies, govts. And companies
for borrowing foreign currency for a specific period of
time.
• The issuer pays interest and makes repayment of
capital.
• There are different kinds of bonds
6. International bonds are classified as foreign bonds and Euro
bonds
Foreign Bonds
• Issued in the currency of the
foreign country
• Underwriters of the country
• Investors of particular country
• Subject to govt. regulation
Euro Bonds
• Denominated in a currency
other than the country
• Underwriters of multi-nationality
• Multinational investors
• Free from rules and regulation
7. Global Bonds
World bank 1989
Since 1992 – by companies
Features
They carry high rating
They are normally large in size
They are offered for simultaneous placement in different
countries
They are traded on “home market” basis in different regions
8. Straight Bonds
Traditional type of bonds. Interest rate is fixed. Known as coupon.
1.Bullet-redemption: Repayment of principal is made at the end of the
maturity and not in installment every year.
2.Rising-coupon: Coupon rate rises over time.
3.Zero-coupon: No interest payment but discount benefits
4.Bonds with currency option: Right to receive payments in a currency
other than the currency of the issue.
5.Bull and bear bonds: Bull- amount of redemption rises with the rise
in the index and reverse happens in bear bonds.
6.Debt warrant bonds: Call warrants attached to them. The creditors
have the right to purchase another bond at a given price.
9. Floating-rate notes
Bonds not carrying fixed rate of interest. Interest rate is revised
periodically.
Types:-
1.Perpetual FRN: Principle amount is never repaid and is like equity
shares. Later lost popularity.
2. Minimax FRN: Minimum and maximum rates are mentioned.
3.Drop lock FRN:- Where the investor has the right to convert FRN
into straight bonds.
4.Flip-flop FRN: Investor has the option of converting FRN into 3
month note with flat 3 month yield. Again, the note can be converted
into perpetual note after the completion of the 3 month period.
5.Mismatch FRN: Interest rate is fixed monthly but paid six-monthly.
10. Convertible Bonds
International bonds are also convertible bonds meaning
that these variants are convertible into equity shares
Convertible bonds command a comparatively high
market value because of the convertibility privilege.
Benefits
Borrower: Cost less; decrease debt-equity ratio after
conversion.
Investor: fixed income before conversion and then
becomes the owner.
11. Cocktail bonds
Bonds are often denominated in a mixture of currency. Such
bonds are known as cocktail bonds.
The investors purchasing the cocktail bonds get
automatically the currency diversification benefits. The
foreign exchange risk on account of depreciation of any one
currency is offset by appreciation of another currency.
12. Short-term and medium-term Instruments
Euro Notes
Euro notes are like promissory notes issued by companies
for obtaining short-term funds.
They are denominated in any currency other than the
currency of the country where they are issued
Low-cost funding route; Documentation requirements are
minimum.
3 main cost component
1.Underwriting fee
2.One time mgnt fee for structuring, pricing and
documentation
3.Margin on the notes themselves.
13. In course of time, a few variants of Euro note issue system
have evolved.
1.Revolving underwriting policy: which there is sole
placement agent who allocates notes among investors at
a uniform pre-set yield.
2. Tender panel system: Which placement agents form a
panel of banks for placing euro notes on behalf of the
issuer.
3. Continuous tender panel: which underwriters constitute a
tender panel for each drawdown of notes.
14. Euro Commercial Papers
Short term debt instrument-1980s
Like promissory note like instrument
Different from Euro notes in some ways
It is not underwritten while Euro notes do( Because it is
issued by company having high credit rating
It is investor driven
The features vary from one country to other
Market based interest rate
Minimum documentation
15. Medium-term Euro Notes
They are just an extension of short-term euro notes
They are a compromise between short term euro notes and
long term euro bonds
Short-term Euro notes are allowed to roll over repeatedly
over 5-7 years, but are reddemed and reissued in 3 or 6
months
Not underwritten but provision exists,
Carry fixed rate and even floating rates exists
The issuers are mainly banks, sovereigns, and international
agencies.
