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
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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’s
l Foreign Bonds and Eurobonds equity markets.
l Types of Instruments l Most issues are denominated in U.S. dollars, euro
l Currency Distribution, Nationality, Type of Issuer and Japanese yen.
l International Bond Market Credit Ratings
l Eurobond Market Structure & Practices
l International Bond Market Indices
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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)
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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)
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Bearer Bonds and
Foreign Bonds and Eurobonds
Registered Bonds
l 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 registered
l 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.
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National Security Registrations Withholding Taxes
l 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 to
l 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 in
l 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.
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2

3. Recent Regulatory Changes Global Bonds
l 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.
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Types of Instruments Straight Fixed Rate Debt
l Straight Fixed Rate Debt l These are “plain vanilla” bonds with a specified
l 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 bond
l Dual-Currency Bonds
offerings are straight fixed-rate issues.
l Composite Currency Bonds
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Floating-Rate Notes Equity-Related Bonds
l Just like an adjustable rate mortgage. l Convertibles
l 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.
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3

4. Zero Coupon Bonds Dual-Currency Bonds
l 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, and
l 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 foreign
l Pricing is very straightforward: subsidiary.
PAR
PV = (1 + r) T
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Characteristics of International Bond
Composite Currency Bonds
Market Instruments
l 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-Rate
l Often called currency cocktail bonds. Annual Fixed Currency of issue
Floating Rate Note Every 3 or 6 months Variable Currency of issue
l 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
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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
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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)
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Eurobond Market Structure International Bond Market Indices
l 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 Journal
l Clearing Procedures
n Euroclear and Cedel handle most Eurobond trades.
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End Chapter Twelve
INTERNATIONAL
FINANCIAL
MANAGEMENT
Fourth Edition
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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
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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
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Market Capitalization of Developed
A Statistical Perspective Countries
l Market Capitalization of Developed Countries l Almost 90% of the total market capitalization of
l Market Capitalization of Developing Countries the world’s equity markets is accounted for by the
market capitalization of the developed world.
l Measures of Liquidity
l Measures of Market Concentration
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Market Capitalization of
Measures of Liquidity
Developing Countries
l 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.
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6

7. Market Structure,
Measures of Market Concentration
Trading Practices, and Costs
l 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.
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Market Structure, Market Structure,
Trading Practices, and Costs Trading Practices, and Costs
l 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 matched
l 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.
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International Equity Market North American Equity Market
Benchmarks Benchmarks
l North America
l Europe NAME SYMBOL
Dow Jones Industrial Average DJIA
l Asia/Pacific Rim
NASDAQ Combined CCMP
Composite
S&P 500 SPX
TSE 300 TS300
Mexico BOLSA Index MEXBOL
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8. Asia/ Pacific Rim Equity Market
European 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
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i Shares MSCI Trading in International Equities
l Country-specific baskets of stocks designed to l Magnitude of International Equity Trading
replicate the country indexes of 21 countries. l Cross-Listing of Shares
l 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.
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Magnitude of International
Cross-Listing of Shares
Equity Trading
l 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.
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8

9. Advantages of Cross-Listing Yankee Stock Offerings
l 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 Europe
l 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. NAFTA
l May offer marketing advantages.
l May mitigate possibility of hostile takeovers.
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The European Stock Market American Depository Receipts
l 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
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American Depository Receipts Volvo ADR
l 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.
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10. Factors Affecting
Global Registered Shares
International Equity Returns
l DaimlerChrysler AG is a German firm, whose l Macroeconomic Factors
stock trades as a GRS. l Exchange Rates
l 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.
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Macroeconomic Factors Affecting Exchange Rates
International Equity Returns
l 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 movements
l That is correspondent with findings for U.S. within that country.
equity markets. l One should be careful not to confuse correlation
with causality.
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Industrial Structure End Chapter Thirteen
l Studies examining the influence of industrial
structure on foreign equity returns are
inconclusive.
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10