Chapter 12: International Bond Market

Dual-Currency Bonds

A straight fixed-rate bond, with interest paid in one currency, and principal in another currency. Japanese firms have been big issuers with coupons in yen and principals in dollars. Good option for financing foreign subsidiary.

Global Bonds

A very large international bond offering by a single borrower that is simultaneously sold in North America, Europe, and Asia. Denominated in US dollars and issued by US corporations trade as Eurobonds overseas and domestic bonds in the US

Equity-Related Bonds

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 of the issuer at a specified price.

Composite Currency Bonds

Denominated in a currency basket, like the SDRs instead of a single currency. Often called currency cocktail bonds Typically straight fixed rate debt.

Bond Market Credit Rating

Fitch, Moody's, and Standard & Poor's Focus on défaut risk, not exchange rate risk Assessing sovereign debt focuses on political risk and economic risk.

Eurobonds

Issues denominated in a particular currency and sold to investors in national capital markets other than the country that issued the currency. Majority of the new international bonds are Eurobonds.

Foreign Bonds

Issues that are offered by a foreign borrower to the investor in a national capital market and denominated in that nation's currency

Bearer Bonds

No registered owner Offer anonymity and privacy

Registered Bonds

Owner's name is registered with the issuer US security laws require Yankee bonds sold to US citizens to be registered.

Euromarket structure

Primary Market: Very similar to US underwriting Secondary Market: OTC market centered in London. Compromised of market makers as well as brokers. Clearing procedures: Euroclear and Cedel handle most Eurobond trades.

Floating-Rate Notes (FRN)

Rate is adjustable Common reference 3-month and 6-month US dollar LIBOR Behave differently to interest rate risk --> they reset every 6 or 12 months, the premium or discount is usually quite small

Zero Coupon Bonds

Sold at a large discount from face value because there is no cash flow until maturity Pricing is straightforward: PV= (FV)/((1+r)^T)

Straight Fixed Rate Debt

These are "plain vanilla" bonds with a specified upon rate and maturity and no options attached. Since most Eurobonds are bearer bonds, coupon dates tend to be annual rather than semi-annual. The vast majority of new international bond offerings are straight-fixed-rate issues.

Four currencies in which the majority of domestic and international bonds are denominated

USD Euro Pound Yen