1. International Bond Market7
Chapter Seven
International Bond Market
Chapter Objective:
This chapter continues discussion of international capital markets with a discussion of the structure of the international bond market.
Chapter Outline
The World’s Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Internat. Bonds and Notes: Currency, Nationality, Type of Issuer
International Bond Market Credit Ratings
Eurobond Market Structure & Practices
International Bond Market Indices

2. 7.1 The World’s Bond Markets
A statistical perspective:
The total market value of the world’s bond markets was over $68 trillion in 2006, $18 trillion of this was classified international debt.
Most issues are denominated in US$, Yen and Euro.
Domestic and international debt outstanding $bn 2

3. International Bonds Foreign Bond:
- Issued by a foreign borrower to investors in another country and denominated in the currency of that country. Yankee, Samurai, Bulldog, Kangaroo, Maple bonds
Investors view it as a debt instrument issued by a foreign instead of a domestic borrower.
Ford issues offers a bond denominated in SFs to Swiss investors.
Eurobond:
- Denominated in a specific currency, but sold to investors in a national capital market other than the country of the denominated currency.
Swiss borrower issues $-denominated bonds to investors in UK, India,and Japan.
Bearer Bonds are bonds with no registered owner. They offer anonymity but they also offer the same risk of loss as currency.
Registered Bonds: the owner’s name is registered with the issuer.
U.S. security laws require Yankee bonds sold to U.S. citizens to be registered.

4. 7.3 Types of Instruments Straight Fixed Rate Debt
Euro-medium term notes
Floating-Rate Notes
Equity-Related Bonds
Zero Coupon Bonds
Dual-Currency Bonds 4

5. Types of Instruments 1. Straight Fixed Rate Debt
These are “plain vanilla” bonds with a specified coupon rate and maturity, and no options attached.
Since most Eurobonds are bearer bonds, coupon dates tend to be annual rather than semi-annual, less costly for issuer.
The vast majority of new international bond offerings are straight fixed-rate issues.
2. Euro-Medium-Term Notes (Euro MTNs)
1 to 10 year notes (medium term) fixed coupon rate
Issued on a continual basis (not all at once like bonds) as MNC needs credit. 
Very popular for issuers due to flexibility. 

6. Types of Instruments 3. Floating-Rate Notes
FRNs are typically medium term bonds with coupon payments indexed to some reference rate.
Common reference rates are 3-month and 6-month U.S. dollar LIBOR
Coupon Payment (6mo.) = 0.5 x (LIBOR + X)
X = default risk premium(%); LIBOR resets.
Since FRN reset every 6 or 12 months, the premium or discount is usually quite small…as long as there is no change in the default risk.

7. Types of Instruments 4. Equity-Related Bonds Convertibles:
Convertible bonds allow the holder to surrender his bond in exchange for a specified number of shares in the firm of the issuer.
Bonds with equity warrants:
These bonds allow the holder to keep his bond but still buy a specified number of shares in the firm of the issuer at a specified price.
These are straight fixed rate bonds with a call option for a number of shares at a strike price over a period of time.

8. Types of Instruments 5. Zero Coupon Bonds
Zeros are sold at a large discount from face value because there is no cash flow until maturity, primarily US $ and Swiss Francs.
Pricing is straightforward:
Stripped Bonds - Making a series of zero coupon bonds from a coupon bonds. 
The coupons and the maturity value are stripped and sold separately as zero coupon bonds.     

9. Types of Instruments 6. Dual-Currency Bonds
Became popular in the mid-1980s
A straight fixed-rate bond, with interest paid in one currency, and principal in another currency.
Investor’s perspective: a long-term forward contract.
Japanese firms have been big issuers with coupons in yen and principal in dollars.
Good option for a MNC financing a foreign subsidiary.

10. International Bond Market Instruments
Frequency of Payment
Size of Coupon
Payoff at Maturity
Straight Fixed-Rate
Annual
Fixed
Currency of issue
Floating Rate Note
Every 3 or 6 months
Variable
Currency of issue
Convertible Bond
Annual
Fixed
Currency of issue
or conversion to equity shares.
Straight fixed rate with equity warrants
Annual
Fixed
Currency of issue
plus conversion to equity shares.
Zero
none
zero
Currency of issue
Dual Currency Bond
Annual
Fixed
Dual currency

11. 7.4 International Bonds and Notes: Currency, Nationality, Issuers
Bonds issued in Canadian dollars represent about 1% of world total 11

12. Distribution of International Bond Offerings by Nationality
Distribution of International Bond Offerings by Nationality 12

13. International Bond Market Credit Ratings
Fitch IBCA, Moody’s , Standard & Poor’s and DBRS sell credit rating analysis.
Focus on default risk, not exchange rate risk.
Assessing sovereign government debt focuses on political risk and economic risk.
Economic risk: external debt, BOP flexibility, economic structure & growth, management of the economy, and economic prospects.

14. Eurobond Market Structure
Primary Market: new issues
Similar to domestic underwriting. - Investment Banks
Underwriters use own funds to buy new issue at a discount from the issue price (2-2.5%) [1% domestic]
Secondary Market: “used” issues = resale
OTC market centered in London. Bid and ask prices.
Comprised of market makers and brokers.
Members of the International Securities Market Association (ISMA), Zurich, Switzerland, self-regulatory organization.
Clearing Procedures
Euroclear and Clearstream International handle most Eurobond trades.

15. International Bond Market Indices
There are several international bond market indices.
J.P. Morgan and Company
Domestic Bond Indices
International Government bond index for 18 countries.
Widely referenced and often used as a benchmark.
Appears daily in The Wall Street Journal

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