GEB 3375 Chp 12

International bonds

(1) Foreign bonds (2) Eurobonds

destabilizing effect of economies

Could deregulation of capital markets and fewer controls on cross-border capital flows make nations more vulnerable to the effects of speculative capital flows?

lower risk

Investors benefit from the wider range of investment opportunities - diversify portfolios and _______

Deregulation

Responsible for the growth of 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

Information technology

Responsible for the growth of capital markets. - 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

drawback

The Eurocurrency market has two significant _______: (1) Because the Eurocurrency market is unregulated, 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

regulated

The Eurocurrency market is attractive because it is not________ 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

Global equity

The _________ market allows firms to: (1) Attract capital from international investors - many investors buy foreign equities to diversify their portfolios (2) List their stock on multiple exchanges - This type of trend may result in an internationalization of corporate ownership (3) Raise funds by issuing debt or equity around the world - by issuing stock in other countries, firms open the door to raising capital in the foreign market - gives the firm the option of compensating local managers and employees with stock - provides for local ownership - increases visibility with local stakeholders

attractive

The eurobond market is _______ because: (1) It lacks regulatory interference - since companies do not have to adhere to strict regulations, the cost of issuing bonds is lower (2) It has less stringent disclosure requirements than domestic bond markets - it can be cheaper and less time consuming to offer Eurobonds than dollar-denominated bonds (3) It is more favorable from a tax perspective - Eurobonds can be sold directly to foreign investors

less

The spread between the Eurocurrency deposit and lending rates is _____ than the spread between the domestic deposit and lending rates - Gives Eurocurrency banks a competitive edge over domestic banks

Bonds

_____ are an important means of financing for many companies - the most common bond is a fixed rate which gives investors fixed cash payoffs

adverse

_____ exchange rates can increase the cost of foreign currency loans - 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

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 foreign exchange risk associated with borrowing in foreign currencies against the costs savings

Todays

______ capital markets are highly interconnected and facilitate the free flow of money around the world Borrowers benefit from the additional supply of funds global capital markets provide - lowers the cost of capital

volatile

_______ exchange rates can make what would otherwise be profitable investments, unprofitable

capital markets

________ exist to bring together investors and borrowers. - loans can be equity or debt

Two factors

are responsible for the growth of capital markets 1) Advances in information technology 2) Deregulation by governments

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 it will reduce the cost of capital

Eurobonds

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

London

became the leading center of the eurocurrency market - continues to hold this position today

investors

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

borrowers

individuals, companies, and governments

Eurocurrency

is 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

market makers

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

cost of capital

the price of borrowing money or the rate of return that borrowers pay investors