Chapter 12 Test 3

eurocurrency

any currency banked outside its countries origin but still stays the same currency -2/3 of eurocurrency are eurodollars

Eurobond

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

the borrowers perspective

attractions of global capital market -benefit from additional supply of funds global capital market provides -lower cost of capital-the price of borrowing or the rate of return that borrowers pay investors(interest rate)

the global market

bonds important means of financing for many companies global market grew during 1980s and 90s and continues to grow -**most common bond: fixed rate which gives investors fixed cash pay off

Why do we have a capital market?

capital market bring together investors and borrowers -investors: corporation with surplus cash, individuals, non bank fiscal institutions -borrowers: individuals, companies, and governments -market makers: financial service companies that connect investors/ borrowers directly (investment banks) or indirectly (commercial)

eurodollars

dollars banked outside of the US other important eurocurrency: euro-yen,euro-pound,euro-euro

attraction of the eurobond market: favorable tax status

eurobonds can be sold directly to foreign investment

why is capital market growing? deregulation

facilitated growth in international capital markets -governments have traditionally limited foreign investments in domestic companies and the amount of foreign investments citizens could make -since 1980s, these restrictions have been falling beginning in US and spreading to Japan, UK, France -After 2008-2009 global financial crisis there are questions if deregulation has gone too far

market size

global capital markets growth rapidly -stock of cross border bank loads: 1990-$3600 billion, 2000-$7859B, 2012-$33913B -international bond market: 1997- $3135 billion, 2007-$5908B, 2012-$21979B

how do exchange rates effect the cost of capital

-adverse exchange rates can increase cost of foreign currency -may initially seem attractive to borrow foreign currencies, when exchange rates is factored in it ma change -firm must weigh benefits of lower interest rate and the risk of an increase in real cost of capital

how does global equity market

-attracts capital from international investors -many investors buy foreign equalities to diversify portfolio -list stock on multiple exchange -results in internationalization of corp ownership

genesis and growth of the market

-began in 1950s when eastern bloc countries feared the US may seize dollar -so deposited them in Europe -1957:market surged again after changes in British law -London: leader of eurocurrency market and still today -1960s:market grew again and changes in US regulation discouraged lending to other countries -1973-1974 and 78-79 big increase in oil prices -Arab members of OPEC accumulated dollars

global capital market risks

-deregulation can have destabilizing effect on economics -speculative capital flow may be result of inaccurate info about investment opportunities -global capital markets continue to grow, better qualify info is likely to be available from financial intermediaries

Why is capital market growing? advances in info technology

-growth of international communication technology and advance in data processing capability -- 24 hour a day trading --shocks in financial market spread globally fast

implication of managers

growth in global capital market has created for firms to borrow or invest internationally -firms often borrow at lower cost then domestic markets -growth in capital offers opportunities to firms/ institutions and individual to individual to diversify their investments and lower risk -capital markets likely to continue to integrate providing more opportunities for business

The eurocurrency market

important source of low cost funds for international companies

the investors perspective

portfolio diversification -benefit from wider range of investment opportunities which diversity portfolios and lowers risk but violate exchange rates can make what would be a profitable investment unprofitable -maybe higher interest rate in another country

the global equity market

raise funds issuing debt/ equity around world -by issuing stock in other countries firms can raise capital in foreign markets -firms can compensate local managers/ employees with stock -provides for local ownership -increase visibility with local stakeholders

attraction of the eurobond market: lack of regulatory interference

since companies do not have to adhere to strict regulation, cost of issuing bond is lower

Foreign Bond

sold outside borrowers country and are denominated in the currency of country in which they're issued -used by companies that want to reduce cost of capital

attraction of the eurobond market: less stringent disclosure requirements

than domestic bond markets -can be cheaper and less time consuming to offer eurobond than dollar denominated bonds

What makes eurocurrency market attractive

-not regulated by government -banks can offer increase interest rate on eurocurrency -banks can charge lower IR to eurocurrency borrowers than in home country -spread between eurocurrency deposit and lending rates is less than the spread between domestic deposits and lending rates -gives eurocurrency a competitive advantage

drawbacks of eurocurrency market

1)because eurocurrency market is unregulated, there is a higher risk that bank failure could cause depositor to lose funds 2)companies borrowing eurocurrencies can be exposed to foreign risks