Erobond Market

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Chapter 1

INTRODUCTION

International financial markets serve as link between the financial markets of each individual

country and as independent markets outside the jurisdiction of any one country. The market

for currencies is the heart of this international financial market. International trade and

investment are often denominated in a foreign currency. So the purchase of the currency

precedes the purchase of goods, services, or assets.

The growth of the foreign currency markets in Europe in the 1960s was one of the first

developments in the movement towards the globalisation of financial markets. Prior to 1980

Eurocurrencies market was the only truly international financial market of any importance.

Eurodollar or Eurocurrency markets are the international currency markets where currencies

are borrowed and lent. Each currency has a demand and a supply. The demand for the foreign

currencies arises when tourists visits another country and need to exchange their national

currency for the currency of the country and need to exchange their national currencies in a

country arises from foreign tourists expenditures in the country, from foreign investments in

the country and so on.

CURRENCY MARKETS

International currency markets are the markets for foreign currencies where the currencies are

borrowed and lent for varying maturities. The price paid for borrowing or lending a currency

in the international currency market is the rate of interest.

The international currency markets are the adjunct of the foreign exchange markets. The

foreign exchange market is the market in which the currencies are exchanged. In the foreign

exchange market one currency is exchanged for another currency at a rate of exchange which

is the rate at which the currency of a country is exchanged against the currency of another


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country. The purpose for which currencies are exchanged in the foreign exchange market or

borrowed in the currency market may be the same, namely, for meeting trade and payments

requirements, or for short-term or long-term investment or for meeting debt or other

obligations. Foreign exchange market and the currency market are interrelated.

FOREIGN CURRENCY MARKET STRUCTURE

The market for foreign currencies is a worldwide market that is informal in structure. This

means that it has no central place like the stock exchanges. The market is actually the

thousands of telecommunications links among financial institutions around the world. It is

open 24 hours a day. Someone, somewhere, is nearly always open for business. For example,

the subscribers to international financial news sources, such as reuters news network, are

connected to spot exchange computer screen. The screen serves as a bulletin board, where all

financial institutions wanting to buy or sell foreign currencies can post representative prices.

Although, the rates quoted on these computer screens are indicative of current prices, the

buyer is still referred to the individual bank for the latest quotation due to the rapid movement

of rates worldwide. There are also hundreds of banks operating in the markets at any moment

that may not be listed on the brief sample of reuters news bulletin, the speed with which this

market moves, the multiple of players playing on a field that is open 24 hours a day, and the

circumference of the earth with its time and days differences procedure many different

single prices. Foreign currency market is the largest and most liquid financial market in the

world. It includes trading between large banks, currency speculators, multinational

corporations, governments, and other financial markets and institutions.


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EUROCURRENCY MARKET

Euro currency refers to commercial bank deposits outside the country of their issue. thus,

any currency internationally supplied and demanded and in which a foreign bank is willing to

accept liabilities and loan assets is eligible to become Eurocurrency. For example, a us

dollar deposit held in London or Paris is a euro-dollar deposit. A deutschemark deposit held

in new York, London, and Paris is a euro mark deposit. Similarly, a pound sterling deposit in

a French commercial bank or in a French branch of a British bank is euro sterling, and so on

these balances are usually borrowed or loaned by major international corporations, and

governments when they need to acquire or invest additional funds.

The market in which borrowing and lending in Eurocurrency takes place is called the

Eurocurrency market. It has two sides to it, that is, the receipt of deposits and the loaning of

that deposits.

The prefix euro is now outdated because such deposits and loans in different currencies are

regularly traded outside Europe, especially in Singapore and hongkong. Thus, Euromarkets

are also referred to as offshore market if such deposits have more widespread geographical

base.

The most important Eurocurrency is the Eurodollar. It is followed by the euro mark, euro

franc (Swiss), euro sterling and euro yen. Initially, only the dollar was used in this fashion,

and the market was therefore called the Eurodollar market subsequently, the other lending

currencies such as the germen mark, the Japanese yen, the British pound sterling, and the

French and Swiss franc, also began to be used in this way. Thus, the market is now called the

Eurocurrency market. The main reason for the rapid growth of Eurocurrency markets is that

they provide better deposit and loan rates an offered by domestic banks located in the country

that issues the currency.


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Eurodollars are deposit liabilities, denominated in us dollars, of banks located outside the

United States and traded in Europe.

The basic characteristics of Eurodollars are that

They are short-term obligations of banks to pay us dollars, and These banks are located outside thus. The banks themselves need not be foreign. They are

often European

Branches of major us commercial banks. Their depositors may be of any nationality. Thedepositors range from European central banks, firms and individuals to us banks,

corporations and residents.

The term Eurodollar came to be used because the market had its origin and earlier

development with dollar transactions in the European money markets. When the European

banks expanded their operations to accept terms such as Eurocurrency market and euro

market came into use. With the spread of the practice of accepting deposits in dollars and

other foreign currencies to other parts of the world, such as Hong Kong and Singapore, the

terms such as Eurocurrency and euro market have also become misleading.

The practice of keeping bank deposits denominated in a currency other

Than that of the country in which the deposit is held has also spread to non-European

international monetary centres as Tokyo, Hong Kong, Singapore and Kuwait and they are

appropriately called offshore deposits. The name euro deposit is often used also for such

deposits outside Europe. With these geographical extensions, the Eurocurrency market has

become an essentially 24-hour a day operation.


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REASONS FOR THE DEVELOPMENT OF THE EUROCURRENCY

MARKET

There are several reasons for the existence and spectacular growth of the Eurocurrency

market, they are:

1. Soviets Deposit of Dollars in European BanksIn the 1950s soviets union was earning dollars from the export of gold and raw materials. The

soviets did not want to keep them in the banks in the united states out of the fear that the US

may freeze them due to the cold war. The soviets wanted dollar claims that were not subject

to any control by the US government. The soviets solved this problem by depositing their

dollar earning with dollar-denominated deposits with banks in Britain and france. These

soviet deposits market the birth of the Eurocurrency market.

2. Restrictions upon Sterling Credit FacilitiesIn 1957, the bank of England introduced restrictions on UK banks ability to lend sterling to

foreigners and foreigners ability to borrow sterling. This induced the british banks to turn to

the US dollars as an alternative means to finance the world trade. This provide a stimulus for

the growth of the Eurocurrency market.

3. Abolition of the European Payments Union and Restoration of Currency ConvertibilityThe European payments union (EPU) enabled the European member countries to settle trade

credits among themselves with the minimum use of dollars. In 1958, EPU was abolished and

convertibility of European currencies was restored. Thus, European banks could hold US

dollars without being forced to convert their dollar holdings with their central banks for

domestic currencies. This provided another impetus to the growth of Eurocurrency market.


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4. US Dollar as a Key CurrencyThe fundamental cause for the development of Eurocurrency market was the special position

of the dollar as a key, or vehicle, currency. The dollar continues to be the main currency that

is used to carry out the international transactions. Because of this special role of the dollar as

a key currency, foreign individuals, corporations and governments preferred to hold dollar

balances.

5.Regulation Q and MIn 1963 the us authorities introduced regulation Q which fixed a ceiling on the interest rate

that US banks could pay on time deposits. Since this regulation did not apply to offshore

banks many US banks set up subsidiaries abroad to escape the banking regulations. Further,

as the interest rates in Europe rose above the ceiling fixed by US authorities, Eurodollar

deposits became more profitable than US deposits. This was another important cause for the

rapid and sustained growth of Eurocurrency market.

Euro banks are also not required to maintain minimum cash reserve with their central banks

enabling them to lend more earn more. In USA under regulation M such reserves are

compulsory.

6. Convenient to Hold Balances AbroadInternational corporations often found it very convenient to hold balances abroad for short

periods in the country in which they needed to make payments. Since the dollar is the most

important international and vehicle currency in making and receiving international payments,

its is only natural a large proportion of the Eurocurrency to be in Eurodollars.


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7. Overcome Domestic Credit RestrictionsAn important reason for the growth of the Eurocurrency market is that the international

corporations can overcome domestic credit restrictions by borrowing in the Eurocurrency

market.

8. Deposit of surplus Funds by OPEC CountriesAfter the oil price increase of 1973, the OPEC countries began to deposit large amounts of

dollars in European banks. The OPEC countries also did not want to keep their dollar

deposits in the united states for fear that the US government might freeze them in political

crisis. This is exactly what happened to the (small-proportion of the) dollar deposits that Iran

and Iraq kept in the US during the US conflict with these countries in the late 1970s and early

1980s, respectively. The euro banks helped to recycle the surplus funds from OPEC countries

to the deficit oil importing countries.

European banks are willing to accept deposits denominated in foreign currencies and are able

to pay higher interest rates on these deposits than US banks because they can lend these

deposits at higher rates. However, the spread between lending and borrowing rates on

Eurocurrency deposits is smaller than that of US banks. Thus, European banks are often able

to pay higher deposit rates and lend at lower rates than US banks. This is the result of:

The fierce competition for deposits and loans in the Eurocurrency market, The lower operating costs in the Eurocurrency market due to the absence of legal reserve

requirements and other restrictions on Eurocurrency deposits,

Economics of scale in dealing with very large deposits and loans. AndRisk diversification.


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CREATION OF EUROCURRENCIES AND DEPOSITS

Eurocurrencies are created when someone who owns dollars deposits them with a bank

outside USA. The Eurocurrency market can potentially create Eurocurrencies in exactly the

same way that commercial banks create money, that is, by making loans which are redeposit

in the same banking system. Euro banks can generate multiple expansions of euro deposits on

receiving a fresh injection of cash. In other words, deposits give rise to deposits which in turn

give rise to deposits, may be with some leakages. Thus, euro banks can generate multiple

deposit creation. This is almost like deposit creation in the domestic monetary system. This is

almost like deposit creation in the domestic monetary system. In the case of domestic

monetary system the cash reserve ratio is voluntarily decided.

The Eurocurrency markets have the potential to create credit and yet remain unregulated. The

rapid growth of the Eurocurrency markets in the 1960s and 1970s had coincided with a high

rise in the inflation rates in the industrialised countries. According to some economists the

growth of Eurocurrency markets was partly responsible for this, since the euro banks have the

ability to create deposits.

CHARACTERISTICS OF THE EUROCURRENCY MARKET

The important characteristics of the Eurocurrency market are the following:

1. Free of government regulation:The Eurocurrency market is an important channel for mobilising funds and deploying them

on an international scale. The important centres are London, Paris , hongkong and Singapore.

It is generally outside the direct control of any government regulation. More specially, they

do not face compulsory reserve requirements, interest ceilings on deposits and so on. It is

generally said that the dollar deposits in London are outside the control of US because they

are in


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London, and they are also outside the control of British government because they are in

dollars.

2. Short-term nature: the deposits and loans of euro banks are predominantly of a short as oneday and majority are under six months. Interest is paid on all of them. The Eurocurrency

loans are generally for short period-three months or less.

3. Close maturity of assets and liabilities: there is a close matching of the maturity of thematurity structure of assets(loans) and liabilities(deposits). This is due to the fact that euro

banks have to be cautious about the sudden large withdrawals of short-term funds by the

depositors. Further, the close matching of assets and liabilities reduce the risk of interest rate

fluctuations to the banks. Here the deposits are for short-term and lendings are for long-term.

Therefore it is necessary to maintain a balance.

4. Euro banks themselves the users of Eurocurrencies: a large proportion of Eurocurrencies areused by the euro banks themselves. Those euro banks with surplus funds loan to euro banks

having lending possibilities but are short of funds. The other users of Eurocurrency market

facilities are non-euro bank financial institutions, multinational corporations, international

institutions like world bank and governments. World bank frequently borrow funds from euro

banks for lending to developing countries. Multinational corporations are attracted by higher

interest rates paid on their deposits and competitive borrowing rates.

5. Wholesale market: Eurocurrency market is a wholesale market in the sense that their size ofindividual transaction is above $1 million. It is centred in London.

6. Well organised, efficient and large market: Eurocurrency market is well organised and veryefficient. It serves a number of roles for multinational business operations. It is an important

and convenient device for multinational corporations to hold their excess liquidity. It is an

important source of short terms loans to finance corporate working capital needs and foreign

trade. It is a large international money market.


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Chapter 2

INSTRUMENTS OF THE EUROCURRENCY MARKET

1. Times Deposits: A large part of money in the Eurocurrency market is held in fixed-rate timedeposits. The maturities of most of them range from one week to six months. The bulk of

Eurocurrency time deposits are interbank liabilities. They pay a fixed, competitively

determined rate of return.

2. Certificates of Deposits: another important instrument is the Eurocurrency certificates ofdeposits (CD). A Eurocurrency CD is a negotiable receipt for a dollar deposit at a bank

outside the US. There also exists an active secondary market for Eurodollar CDs. This allows

investors to sell Eurodollar CDs before the deposits nature. Eurodollar CDs are issued by

banks to tap the market for funds and are commonly issued in denominations varying from

$250,000 to $5 million.

3. Eurodollar Floating Rate CDs (FRCDs) and Eurodollar floating rate notes(FRNs): FRCDs and FRNs came into use as a means of protecting both borrower and lender against

interest rate risk. By making their coupon(interest rate) payments float with market rate of

interest, they help to stabilise the principal value of the paper. FRCDs are not very active

now-a-days.

4. Note Issue Facilities (NIFs): NIFs became a significant Eurodollar instrument in the mid-1980s. It is an arrangement between a borrower and an underwriting bank under which the

borrower can issue short- term paper known as euro notes in its own name.under such an


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The national monetary authorities lose effective control over monetary policy since domesticresidents can make their efforts less effective by borrowing or lending abroad. Since

Eurocurrency market contributes to increasing the degree of international mobility of capital,

it makes monetary policy less effective. Eurocurrency market provides opportunities for

avoiding many of the regulations that the monetary authorities try to enforce on domestic

money markets.

Since the Eurocurrency market can be a source of international liquidity it can contribute toinflationary tendencies in the world economy.

The Eurocurrency market allows the central banks of deficit countries to borrow for balanceof payments purposes. This may make these countries to postpone the needed balance of

payments adjustment measures.

Advantages:

Despite these problems arising from the growth of Eurocurrency market, it has given rise to

many advantages.

It has helped to alleviate considerably the international liquidity problem It has provided credit to countries to finance the balance of payments deficits. In other words,

it has played an important role in recycling funds from surplus to deficit countries.

It has helped to meet the short-terms credit requirements of business corporations. It has provided a market for profitable investment of funds by commercial banks. It has enabled the exporters and importers to obtain credit. This Eurocurrency market has helped to accelerate the economic development of some

countries like south Korea, Taiwan and brazil

It has been largely responsible for the increased degree of financial integration betweeneconomics.


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Eurocurrency markets have become important source of finance for governments and privatefirms. The importance of Eurocurrency market is likely to grow with the growing integration

of the world economy and globalisation. Their competitive deposit and lending rates prove to

be attractive for both investors and borrowers of funds. At the same time, the growth

Eurocurrency market has made monetary control more difficult for domestic authorities.


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Chapter 3

EUROBONDS

Eurobonds are long-term debt securities that are sold outside the borrowers country to raise

long-term capital in a currency other than the currency of the country where the bonds are

sold. For example, an US corporation selling bonds in London denominated in euros or us

dollars. The incentive for Eurobonds is that they generally represent a lower cost of

borrowing long-term funds than available alternatively.

DEFINING FEATURES OF EUROBOND

Conventional foreign bonds are much simpler than Eurobonds; generally, foreign bonds are

simply issued by a company in one country for purchase in another. Usually a foreign bond is

denominated in the currency of the intended market. For example, if a Dutch company wished

to raise funds through debt to investors in the United States, it would issue foreign bonds

(dollar-denominated) in the United States.

By contrast, Eurobonds usually are denominated in a currency other than the issuer's, but

they are intended for the broader international markets. An example would be a French

company issuing a dollar-denominated Eurobond that might be purchased in the United

Kingdom, Germany, Canada, and the United States.

Like many bonds, Eurobonds are usually fixed-rate, interest-bearing notes, although many are

also offered with floating rates and other variations. Most pay an annual coupon and have

maturities of three to seven years. They are also usually unsecured, meaning that if the issuer

were to go bankrupt, Eurobond holders would normally not have the first claim to the defunct

issuer's assets.

However, these generalizations should not obscure the fact that the terms of many Eurobond

issues are uniquely tailored to the issuers' and investors' needs, and can vary in terms and
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form substantially. A large number of Eurobond transactions involve elaborate swap deals in

which two or more parties may exchange payments on parallel or opposing debt issues to

take advantage ofarbitrage conditions or complementary financial advantages (e.g., cheaper

access to capital in a particular currency or funds at a lower interest rate) that the various

parties can offer one another.

Eurobonds are different from foreign bonds. Foreign bonds are issued by a borrower in a

domestic capital market other than its own and usually denominated in the currency of that

market. Eurobonds are issued in Eurocurrencies by an international syndicate of banks in

several international financial markets. Because Eurobonds are issued and traded on

international financial markets, they are not subject to the rules and regulations that are

common to most domestic bond markets, although there are inter-professional rules and

regulations issued by ISMA. Issuers are also subject to the rules and regulations of the

monetary authorities in their country of residence. In any case, the development of the

Eurobond market is synonymous with the absence of withholding tax. The first Eurobond

borrowing dates back to 1963 when the interest equalization tax (IET) imposed by the United

States stopped the development of the Yankee bond market dead in its tracks. A Yankee bond

is a foreign bond issued in the US market, payable in dollars and registered with the SEC.

Eurobond issues characteristically have shorter maturities than those found on domestic

markets. The large majority of Eurobond issues have maturities less than or equal to five

years. The development of the Euro note facility and Euro MTNs in the 1980s reinforced this

tendency. Euro notes are short-term, fully negotiable, bearer promissory notes, issued at a

discount to face value and typically of one, three or six-month maturity. Euro MTNs are

medium-term bearer notes of small denomination with maturities ranging from one to five

years. Issuing procedures have evolved since the Eurobond markets inception. At the

beginning, the traditional issuing procedure, called European, was cumbersome. Syndicates
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often contained as many as several hundred members for the jumbo loans of USD 1 billion or

more. Final investors were institutions like pension funds, investment funds and insurance

companies, as well as private individuals attracted by the absence of withholding tax and the

anonymity of bearer certificates.

COMPOSITION OF EUROBOND MARKET

The Eurobond market is made up of investors, banks, borrowers, and trading agents that buy,

sell, and transfer Eurobonds. The Eurobond market consists of several layers of participants.

First there is the issuer, or borrower, that needs to raise funds by selling bonds. The borrower,

which could be a bank, a business, an international organization, or a government,

approaches a bank and asks for help in issuing its bonds. This bank is known as the lead

manager and may ask other banks to join it to form a managing group that will negotiate the

terms of the bonds and manage issuing the bonds. The managing group will then sell the

bonds to an underwriter or directly to a selling group. The three levelsmanagers,

underwriters, and sellersare known collectively as the syndicate. The underwriter will

actually purchase the bonds at a minimum price and assume the risk that it may not be

possible to sell them on the market at a higher price. The underwriter (or the managing group

if there is no underwriter) sells the bonds to a selling group that then places bonds with

investors. The syndicate companies and their investor clients are considered the primary

market for Eurobonds; once they are resold to general investors, the bonds enter the

secondary market. Participants in the market are organized under the International Primary

Market Association (IPMA) of London and the Zurich-based International Security Market

Association (ISMA).

After the bonds are issued, a bank acting as a principal paying agent has the responsibility

ofcollecting interest and principal from the borrower and disbursing the interest to the
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investors. Often the paying agent will also act as fiscal agent, that is, on the behalf of the

borrower. If, however, a paying agent acts as a trustee, on behalf of the investors, then there

will also be a separate bank acting as fiscal agent on behalf of the borrowers appointed.

In the secondary market, Eurobonds are traded over-the-counter. Major markets for

Eurobonds exist in London, Frankfurt, Zurich, and Amsterdam.

Eurobonds are a special kind of bond issued by European governments and companies, but

often denominated in non-European currencies such as dollars and yen. They are also issued

by international bodies such as the World Bank. The creation of the unified European

currency, the euro, has stimulated strong interest in euro-denominated bonds as well;

however, some observers warn that new European Union tax harmonization policies may

lessen the bonds' appeal.

NEGOTIABLE INSTRUMENT

Eurobonds are unique and complex instruments of relatively recent origin. They debuted in

1963, but didn't gain international significance until the early 1980s. Since then, they have

become a large and active component of international finance. Similar to foreign bonds, but

with important differences,

POPULARITY OF EURO BONDS

Eurobonds became popular with issuers and investors because they could offer certain tax

shelters and anonymity to their buyers. They could also offer borrowers favourable interest

rates and international exchange rates.

Eurobonds are different from foreign bonds. Foreign bonds refer simply, to bonds sold in a

foreign country but denominated in the currency of the country in which the bonds are being

sold. An example is an us multinational corporation selling bonds in Britain, denominated in
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pounds. On the other hand, Eurobonds are bonds sold in a foreign country and denominated

in another currency.

The leading centres in the Eurobond market are London, Frankfurt, new York , Tokyo. In

1998 about 45 percent of Eurobond issues were denominated in US dollars, 17 percent in

deutsche marks, 9 percent in pound sterling, 6 percent in French francs, 5 percent in Japanese

yen, 3 percent in Swiss francs, and small percentages in other currencies. Some Eurobonds

are denominated in more than one currency in order to give the lender a choice of the

currencies in which to be repaid. This will provide some exchange rate protection to the

lender. Eurobonds differ from most domestic bonds. Eurobonds are usually unsecured, that is,

they do not require collateral, while domestic bonds are secured. Eurobonds are issued in

Eurocurrencies by an international syndicate of banks in several international financial

markets. As they are issued and traded in international financial markets. They are not subject

to the rules and regulations that apply to domestic bond markets.

Euro convertible bonds: some euro-bonds have important equity options. Under this category

the bond holder obtains the benefit or right of converting bonds into equity. An euro-

convertible bond is a quasi equity issue, that is, the bond holder acquires an option to convert

debt instrument (bond) into an equity investment. A euro bond can be converted into a certain

number of equity shares at a pre-determined price.

The annual coupon on euro convertible bond is normally lower than other bonds. The

difference is the value of conversion time depends on share price. If share price prospect for

growth remains low then no conversion may take place conversion is profitable when price

moves higher.

The issuing company has a right of call option, that is, an issuing company can buy back the

bonds by giving a notice of its intension to buy. The investor has a put option. That is the

bond holder can sell the bonds back to the issuer. Issuing companies are not allowed to


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exercise their call option unless the closing price of the shares, for a period of 30 days,, prior

to the notice of redemption is at least 140-150 percent of the conversion which was

originally agreed upon.


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Chapter 4

EUROCURRENCY/OFFSHORE BONDS MARKET

Bonds are debt instruments issued by a Borrower, acknowledging borrowing of a specified

sum of money, for a defined period, at a predicated coupon rate

The Bond Market is the environment in which the issuance and trading of such debt

instruments and securities occurs. The bond market primarily facilitates the transfer of capital

from savers to the issuers or organizations requiring capital for business expansions and on-

going operations.

TYPES OF BONDS

Domestic BondsDomestic Bonds can be defined as Debt instrument issued by a borrower in the domestic

currency in his home country. Example, an issue of Bonds by Microsoft denominated in USD

and sold in US represents a domestic bond issue.

Foreign BondsForeign Bonds can be defined as debt instruments issued by a borrower in the a foreign

country and denominated in the currency of that country. Example, an issue of bonds by

Microsoft in UK denominated in GBP would be classified as Foreign Bonds. Such bonds are

subject to regulation clearance in the country in which they are issues. They also have to

adhere to withholding tax provisions between the concerned countries. E.g.: Yankee Bonds:

A bond issued by a foreign entity in the US market and denominated in US Dollars is defined

as Yankee Bond. In general, foreign bonds normally require the regularity clearances of the

local authority and have nicknames in keeping with the country in which they are issued.

Euro-currency Bonds/Offshore bonds


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Euro Bonds can be defined as bonds issued by a borrower in a country other than his own

country and denominated in a non-resident currency. Example, an issue of bonds by

Microsoft in UK denominated in CHF would be classified as Euro-Bond issue. Euro-Bonds

are bearer instruments which are not subject to withholding tax deductions. The issue is sold

to a syndicate of underwriting banks, who then, place the bonds with investors as per market

demand. The acquisition price of the bonds for the ultimate individual investors is therefore

different from one-another.

TYPES OF EURO CURRENCY/OFFSHORE BONDS

1. Straight BondsThese bonds provide for a fixed coupon rate for the entire duration of the bond. Generally, such

interest is paid on half yearly basis such bonds also have long maturity periods and provide for

repayment of the principle also have long maturity. Such pattern of repayment is called bullet

repayment. Normally issuers with good credit rating these bonds.

2. Sinking Fund BondsThese bond provide for repayment of the principle in instalments during the lifetime of the bond. Such

bonds are issued by companies with average credit rating. The repayment in instalments assures the

investors about the solvency and credit-worthiness of the issuer. It also helps to progressively reduce

the interest liability of the issuer.

3. Bonds with OptionsThese bonds provide an option for prepayment either to the issuer or to the investor. Such bonds can

be of 2 types:

Bonds with Call OptionBonds with Call Option allow the issuer to repay the principle on a specified date before maturity.

Such bonds normally carry an above normal coupon rate. Such bonds are issued when the issuer

anticipates a substantial reduction in interest rates.


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Bonds with Put OptionInvestor desires with Put Option when they are anticipating an increase in the interest rates. The Put

Option entitles them to obtain early payment of the principle on a specified date before maturity. Such

bonds normally carry a below normal rate.

4. Floating Rate BondsBonds which are issued with a variable coupon rate are called Floating Rate Bonds. Such bonds

provide for a periodic revision in the interest rate. This revision is based on a specified benchmark

rate. In most countries, the 6 months Treasury bill rate operates as a benchmark for such revisions.

5. Collared BondsFloating rate bonds sometimes provide for either a ceiling or a floor rate of interest. The

ceiling rate protects the investor since it signifies the maximum liability whereas the floor

rate protected the issuer since it signifies the minimum return. Bonds which provide foe both

ceiling and floor rates of interest are called Collared Bonds .

6. Junk BondsCompanies with very poor credit rating into high risk business ventures issue such bonds.

These bonds carry coupon rates at least 3-4% above the normal rates. A characteristic feature

of these bonds is the high turnover of investors. Such bonds are used to corporate entities and

individuals to make short term gains on temporary surplus liquidity.

7. Zero Coupon BondsZero Coupon Bonds do not carry any interest rate and are issued at a discount to face value whereas

the redemption takes place on maturity at face value. The difference between the issue price and the

redemption price provides the return to the investor by way of capital gains.

8. Deep Discount Bonds


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These bonds are also issued at discount to face value and redeemed at face value on maturity. The

difference between the issue price and the redemption price represents interest to the investors unlike

in Zero Coupon Bonds where it represents capital gains.

EUROBONDS IN INDIAN MARKETS

Indian companies have issued Eurobonds in the international market even before the

liberalization. But all these bonds were issued by public sector organizations and are of

fixed coupon, fixed maturity and without having the convertibility option. It must be

noted here that all these Eurobonds were nonconvertible by force and not by design. Till

1990, no Indian company had issued ADRs/GDRs. Without these, the foreign investors

were not keen on converting these Eurobonds are holding underlying shares as Indian

Equity market was considered opaque and was full with regulatory complexities. Table

36.2 lists the Eurobonds issued by Indian companies during 1986 to 1990 in different

currencies.

Reliance Industries also raised the first-ever Pound sterling bond in UKmarket in 1997. It raised 100-million, 10-year maturity having coupon rate

linked to 10-year UK gilts.

ICICI Ltd. also floated two bonds in Switzerland similar to the Yankee bond.These bonds are known as Alpine Bonds


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Euro Bonds issued during 1986-1990

IT can be seen from the above table that all the issuers were quasi-government organizations

and these bond issues came with sovereign guarantee.

After 1992, many private Indian companies have tapped the Eurobond market. Baring

few fixed coupon fixed maturity issues majority of companies issued foreign currency

convertible Eurobonds (FCCBs). These FCCBs are either to be converted to domestic

shares or to GDRs/ADRs.

FCCB issues have become millstones around many Indian companies. Many FCCBs

were issued when underlying stock prices were ruling high. Indian companies pegged the

FCCB conversion price at a very high price. Hence many FFCB holders did not convert

these to hold underlying shares and many companies faced principal redemption pressure.

.

Name Date of issue Amount Date of Maturity Coupon rate in

respective currency

IDBI June-89 $ 100mn June-96 10 %

ONGC Dec-88 $ 125mn Nov-93 9.75 %

SBI June-88 Yen 15bn June-93 5.25 %

IDBI March-87 DM 200mn Dec-94 6.375 %

IDBI Sept-88 DM 250mn Sep-95 6.625 %

IDBI Feb-86 DM 100mn Feb-93 7 %

ONGC 2/1987 DM 150mn Feb-94 6.375 %


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Chapter 5

EUROEQUITY

Business firms raise finance in domestic as well as foreign markets by marketing bonds and

equities. Among foreign markets, the euro market is one of the important financial market

where firms raise finance through euro equities besides Eurobonds.

Euro equity issue refers to a process whereby a company raises funds through the sale of

equities using global depository receipts (GDR) as a financial instrument, in more than one

foreign market, except in the domestic market of the issuing company. GDRs are

denominated in a currency other than the home currency of the issuing company.

Euro equities are sold through global depository receipts (GDRs) in international markets

specially Eurocurrency market. GDRs are tradable securities issued by the depository bank

against the domestic shares of the issuing company (sponsor firm).

A GDR represents one or more shares of a sponsored or issuing company. The issuing

company deposits the shares with the depository bank. with the help of brokers, the

depository banks sell the shares through depository receipts. The investor does not get the

possession of shares but only the depository receipts. GDRs holders have no voting rights

unless GDRs are converted to shares.

Raising funds through euro equity involves the following:

1. Sponsor or issuing companyIt is the company which desires to raise capital through euro-equities. It appoints depository

banks and provides all the information to the investment bankers.


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2. Depository bankIt prepares and issues GDRs. It also appoints a local custodian. It is responsible for issuing

and cancelling of GDRs.

3. Investment bankersThey form the syndicate of participating banks, Work out underwriting process, Help in

completing all the technical requirements.

4. CustodianIt holds the underlying ordinary shares of GDRs. It works as a local agent for depository

bank.

Besides the above, other parties involved are brokers, lawyers and accountants who help in

the process of marketing GDRs.

The important stock exchanges which deal in GDRs are:

London stock exchange Luxembourg stock exchange Dubai international financial exchange and Hong Kong stock exchange.

Indian companies which are listed and have a consistent track record of past three years can

market euro equity through GDRs. This requirement was relaxed for raising funds for

infrastructure projects. From May 1992 onwards, Indian companies have been issuing GDRs,

foreign currency convertible bonds, euro currency bonds in the euro market on a large scale.

Indian government relaxed rules about remitting funds into India and its use for approved

uses. The restriction on the number of issues that a company could float during a financial

year was also relaxed.


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DISTINCTION BETWEEN EURO-BONDS AND EURO CREDITS

EURO-BONDS EURO CREDITS

1 Euro-bonds are medium to long term

instrument issued for periods from 5-

40 years.

Euro-Credits are short to medium term

instrument issued for periods from 5-8

years.

2 Euro-bonds often provide for a fixed

coupon/interest rates for the entire

duration of the bond.

Euro credits are always given on

floating rate basis.

3 The amount of the Bond issue

becomes available to the borrower on

the date of subscription. Liability for

interest on the entire amount begins

from day of receipt

Euro credit agreements provide for

drawing of loan in stages depending on

the project requirement. Interest

liability on each component begins

from the date of drawing.

4 Bonds cannot be issued in multiple

currencies

Loans can be availed of in different

currencies

5 Unless a bond provides a call option,

there is no provision for early

repayment of bonds

Euro-credit agreements make

provisions for early repayment on the

roll-over dates without any

commitment charges.

6 Coupon rates on bonds are based on

deposit rates and are therefore lower

than rates payable for loans.

Euro-credit interest rates are based on

borrowing rates and are therefore

higher than bond rates.


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7 Since bonds have to be marketed to the

international investors, raising finance

through the issue of bonds is a slower

process.

Loan syndication can be completed in a

very short span of time.

DISTINCTION BETWEEN EURO CURRENCY MARKET AND FOREIGN

EXCHANGE MARKET

EURO CURRENCY MARKET FOREIGN EXCHANGE MARKET

1 This market deals with borrowing and

lending of currencies.

This market deals with purchasing and

selling of currencies.

2 It is an unregulated market. These markets are regulated by the

respective national monetary

authorities.

3 This market functions on interest rates. This market functions on exchange

rates.

4 It is essential a wholesale market It operates at both retail and wholesale

levels.

5 Transactions are mainly done in

standard quantities.

Transactions at retail level are

customised.

6 Lending is not security oriented. Security based approach to lending.

7 Euro-banks face a permanent asset

liability mismatch problem.

No such limitation


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CONCLUSIONS AND FINDING

Eurobonds are different from foreign bonds. Foreign bonds refer simply, to bonds sold in a

foreign country but denominated in the currency of the country in which the bonds are being

sold. An example is an us multinational corporation selling bonds in Britain, denominated in

pounds. On the other hand, Eurobonds are bonds sold in a foreign country and denominated

in another currency.

The leading centres in the Eurobond market are London, Frankfurt, New York, Tokyo. In

1998 about 45 percent of Eurobond issues were denominated in US dollars, 17 percent in

deutsche marks, 9 percent in pound sterling, 6 percent in French francs, 5 percent in Japanese

yen, 3 percent in Swiss francs, and small percentages in other currencies. Some Eurobonds

are denominated in more than one currency in order to give the lender a choice of the

currencies in which to be repaid. This will provide some exchange rate protection to the

lender. Eurobonds differ from most domestic bonds. Eurobonds are usually unsecured, that is,

they do not require collateral, while domestic bonds are secured. Eurobonds are issued in

Eurocurrencies by an international syndicate of banks in several international financial

markets. As they are issued and traded in international financial markets. They are not subject

to the rules and regulations that apply to domestic bond markets.


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BIBLIOGRAPHY

Books:

Mithani I. M, Introduction to International Economics, Vora & Co,2009.

Govind Sowani,2011,International Finance, Rishabh Publishing House, as Per RevisedSyllabus of Nov 2011

Johnson, Mascarenhas,2012,Economics of Global Trade and Finance, MananPublications, as Per Revised Syllabus w.e.f.June 2012.

Websites:

http://en.wikipedia.org/wiki/Eurobond http://www.investinganswers.com/financial-dictionary/bonds/eurobond-2292 http://www.referenceforbusiness.com/encyclopedia/Ent-Fac/Eurobond-Market.html
http://en.wikipedia.org/wiki/Eurobondhttp://www.investinganswers.com/financial-dictionary/bonds/eurobond-2292http://www.referenceforbusiness.com/encyclopedia/Ent-Fac/Eurobond-Market.htmlhttp://www.referenceforbusiness.com/encyclopedia/Ent-Fac/Eurobond-Market.htmlhttp://www.investinganswers.com/financial-dictionary/bonds/eurobond-2292http://en.wikipedia.org/wiki/Eurobond

Documents

Erobond Market