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The InternationalBanking

& Money Market

PART I


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The I nternational Bond

Market


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Corporate Sources & Uses of FundsSOURCES

OF

FUNDS

Internally

Generated Cash

Short-term

External Funds

Long-term

External Funds

Short & Medium

Term Bank loans

Publicly or

Privately

placed Bonds


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International Financial Markets

Markets where foreigners can both borrowand lend money

Important international financial centers areLondon, Tokyo and New York

Important financial entrepots or channels areSwitzerland, Luxembourg, Singapore, HongKong, the Bahamas and Bahrain


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The Eurocurrency Market

A Eurocurrency is a dollar or other freelyconvertible currency deposited in a bankoutside its country of origin

E.g. US dollars on deposit in London becomeEurodollars


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The Eurobond Market

Eurobonds are bonds sold outside the

countries in whose currencies they aredenominated

Eurobonds are similar in many respects to thepublic debt sold in domestic capital markets


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The International Bond Market

The bond market is a financial market where

participants buy and sell debt securities , usuallyin the form of bonds

As of 2009, the size of the worldwide bond

market is an estimated $82.2 trillion , of whichthe size of the outstanding U.S. bond marketdebt was $31.2 trillion according to BIS


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Participants include:

Financial Institutions

Governments

International Organisations

Corporate Issuers


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The international bond market encompasses two

market segments:

1. Foreign Bonds

2. Eurobonds


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Foreign Bonds

A foreign bond is one offered by a foreign

borrower to the investors in a national capitalmarket and denominated in the nations

currency

Example: A German MNC issuing dollar-denominated bonds to U.S. investors


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Eurobonds

A Eurobond issue is one denominated in a

particular currency but sold to investors innational capital markets other than the countrythat issued the denominating currency

Example: A Dutch borrower issuing dollar-denominated bonds to investors in the U.K.,Switzerland, and the Netherlands


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Bond Markets

The markets for foreign bonds and Eurobonds

operate in parallel with the domestic nationalbonds market and all the three compete withone another

Eurobonds are known by the currency in whichthey are denominated e.g. Eurodollar bonds,Euroyen bonds, EuroSF bonds etc.


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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


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Bond MarketsGlobal Bonds:

A global bond issue is a very large internationalbond offerings by a single borrower that issimultaneously sold in North America, Europe

and Asia

The issues were first offered in 1989


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International Bonds- Types of

Instruments

Straight Fixed-Rate Issues:

Principal payable on maturity; coupon paymentson annual basis


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Instruments

Euro-Medium-Term Notes (Euro-MTNs):

Fixed rate notes with maturities from less than ayear to about ten years

Euro MTN issue is partially sold on a continuousbasis


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Instruments

Floating Rate Notes (FRNs):

Medium-term bonds with coupon paymentsindexed to some reference rate (e.g. 3 month

LIBOR)Coupon payments are usually quarterly orsemiannual


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Instruments

Equity-Related Bonds:

1. Convertible Bond:

- allows the investor to exchange the bond

for a predetermined number of equityshares of the issuer


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Instruments

Equity-Related Bonds:

2. Bonds with equity warrants:

- a straight fixed-rate bond with the addition

of a call option (warrant) feature. Thewarrant entitles purchase of certain numberof equity shares at a prestated price


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Instruments

Zero-Coupon Bonds:

Zero- coupon bonds are sold at a discount fromface value and do not pay any coupon over

their life


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Instruments

Zero-Coupon Bonds:

Another form of zero-coupon bonds are strippedbonds

A stripped bond is a zero-coupon bond thatresults from stripping the coupons and principalfrom a coupon bond (e.g. US Treasury STRIPS)


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Instruments

Dual-Currency Bonds:

A dual-currency bond is a straight fixed-ratebond issued in one currency, say, euro, thatpays coupon in the same currency

At maturity, the principal is repaid in anothercurrency, say, US dollars


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Eurobond Market Structure

Primary Market:

A borrower desiring to raise funds by issuingEurobonds to investors contacts an investment

banker


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Eurobond Market Structure

Secondary Market:

Eurobonds initially purchased in the primarymarket may be resold prior to their maturity inthe secondary market

It is an over-the-counter market with principaltrading in London and some other centers suchas Zurich, Luxembourg, Frankfurt and

Amsterdam


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Advantages of the Eurobond MarketsTo Borrowers:

Size and depth of the market are large

Freedom and flexibility not found in domesticmarketsRelatively low costs ( around 2.5%)Interest costs are competitive ( especially

dollar Eurobonds)Long maturity periods suitable for long-termfunding ( 30 years)Sound institutional framework for underwriting,distribution and placement of securities


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Advantages of the Eurobond Markets

To Investors:

Interest can be paid free of income taxIssuers are of high credit standing :government, international organisations or

MNCsConvertible Eurobondsvalue addition

Rated instruments


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International Bond Amounts Outstanding by

Major Instruments

Dec. 2008 Dec. 2009 March 2010

Instrument

Straight fixed-rate 14428.4 17274.2 17235.9

Floating-rate note 7892.0 8357.2 7988.8

Straight fixed-rate with equity

warrants

396.7 447.2 446.1

Total 22717.1 26078.6 25670.8

Billions of US Dollars


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Major Issuers

Dec. 2008 Dec. 2009 March 2010

Financial Institutions 17,925.70 20,030.10 19,531.10

Governments 1,794.60 2,232.20 2,254.40

International Organisations 637.90 791.50 814.10

Corporate Issuers 2,359.00 3,024.70 3,071.20

Total 22717.20 26078.50 25670.80



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Major Currencies

Dec. 2008 Dec. 2009 March 2010

Euro 10873.9 12387.6 11813.8

US Dollar 8215.1 9429.0 9718.1

Pound Sterling 1701.8 2145.5 2028.3

Yen 746.7 693.9 668.7

Other 1179.7 1422.5 1441.9

Total 22717.2 26078.5 25670.8



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