AGB 302 Module 4 Chapter 12

What Is the Global Bond Market?

-Bonds are an important means of financing for many companies -The most common kind is a fixed rate bond which gives investors fixed cash payoffs -The global bond market grew rapidly during the 1980s and 1990s and continues to do in the new century

Why is the Global Capital Market Growing?

1. Advances in information technology 2. Deregulation by governments

What Makes the Eurobond Market Attractive?

1. It lacks regulatory interference 2. It has less stringent disclosure requirements than domestic bond markets 3. It is more favorable from a tax perspective

How Do Exchange Rates Affect the Cost of Capital?

Adverse exchange rates can increase the cost of foreign currency loans Although it may initially seem attractive to borrow foreign currencies, it may be less attractive when exchange-rate risk is factored in firms can hedge their risk by entering into forward contracts but this will also raise costs Firms must weigh the benefits of a lower interest rate against the risk of an increase in the real cost of capital

What Is the Global Equity Market?

Allows firms to attract capital from international investors, list their stock on multiple exchanges, raise funds by issuing debt or equity around the world

What is Eurocurrency?

Any currency banked outside its country of origin. About two-thirds of all Eurocurrencies are Eurodollars dollars banked outside the U.S. Other important Eurocurrencies are the euro-yen, the euro-pound, and the euro-euro The Eurocurrency market is an important source of low-cost funds for international companies

What makes the global capital market attractive?

Borrowers benefit from the additional supply of funds global capital markets provide lowers the cost of capital the price of borrowing money or the rate of return that borrowers pay investors Investors benefit from the wider range of investment opportunities diversify portfolios and lower risk But, volatile exchange rates can make what would otherwise be profitable investments, unprofitable

Why do capital markets exist?

Capital markets bring together investors and borrowers

How Have Global Capital Markets Changed Since 1990?

Global capital markets have grown rapidly the stock of cross-border bank loans was just $3,600 billion in 1990, $7,859 billion in 2000, $33,913 billion in 2012 the international bond market has grown from $3,515 billion in 1997, $5,908 billion in 2000, $21,979 billion in 2012

What Do Global Capital Markets Mean for Managers?

Growth in global capital markets has created opportunities for firms to borrow or invest internationally firms can often borrow at a lower cost than in the domestic capital market firms must balance the cost savings against the foreign-exchange risk associated with borrowing in foreign currencies Growth in capital markets offers opportunities for firms, institutions, and individuals to diversify their investments and reduce risk again though, investors must consider foreign exchange rate risk Capital markets are likely to continue to integrate, providing more opportunities for business

Foreign Bonds

are sold outside the borrower's country and are denominated in the currency of the country in which they are issued used by companies when they think they will reduce the cost of capital

What Are the Risks of the Global Capital Markets?

can have a destabilizing effect on economies Speculative capital flows may be the result of inaccurate information about investment opportunities if global capital markets continue to grow, better quality information is likely to be available from financial intermediaries

Investors

corporations with surplus cash, individuals, and non-bank financial institutions

Why Has the Eurocurrency Market Grown?

could earn a higher rate of interest in London under the new laws, British banks had to attract dollar deposits and loan dollars rather pounds to finance non-British trade London became the leading center of the Eurocurrency market (still is) Changes in U.S. regulations discouraged U.S. banks from lending to non-U.S. residents would-be borrowers of dollars outside the U.S. turned to the Euromarket as a source of dollars The next big increase came after the 1973-74 and 1979-80 oil price increases Arab members of OPEC accumulated huge amounts of dollars avoided potential confiscation of their dollars by the U.S. by depositing them in banks in London

capital market loans can be....

equity or debt

Deregulation by governments

has facilitated growth in international capital markets governments have traditionally limited foreign investment in domestic companies, and the amount of foreign investment citizens could make since the 1980s, these restrictions have been falling Deregulation began in the U.S., then moved to Great Britain, Japan, and France Many countries have dismantled capital controls making it easier for both inward and outward investment to occur The 2008-2009 global financial crisis raised questions as to whether deregulation had gone too far

Borrowers

individuals, companies, and governments

Who Are the Main Players in Capital Markets?

investors, market makers, borrowers

What makes the eurocurrency market attractive?

it is not regulated by the government banks can offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency banks can charge lower interest rates to Eurocurrency borrowers than to those who borrow the home currency The spread between the Eurocurrency deposit and lending rates is less than the spread between the domestic deposit and lending rates

markets makers

the financial service companies that connect investors and borrowers, either directly (investment banks) or indirectly (commercial banks)

Advances in information technology

the growth of international communications technology and advances in data processing capabilities 24-hour-a-day trading so, shocks that occur in one financial market spread around the globe very quickly

What Makes the Eurocurrency Market Unattractive?

there is a higher risk that bank failure could cause depositors to lose funds can avoid this risk by accepting a lower return on a home-country deposit 2. Companies borrowing Eurocurrencies can be exposed to foreign exchange risk can minimize this risk through forward market hedges

Eurobonds

underwritten by a syndicate of banks and placed in countries other than the one in whose currency the bond is denominated