Key Takeaways
- Bonds issued in foreign currency outside issuer's country.
- Issued by corporations, governments, and international organizations.
- Varieties include fixed-rate, floating-rate, and zero-coupon bonds.
- Provides access to foreign capital and tax advantages.
What is Eurobond?
A Eurobond is a debt security issued in a currency different from the country where it is issued, allowing issuers to access foreign capital markets. Despite its name, Eurobonds are not limited to Europe and can be denominated in any currency, such as US dollars or Japanese yen.
These bonds often have a face value and are popular among corporations and governments seeking flexible funding outside their domestic markets.
Key Characteristics
Eurobonds have distinct features that differentiate them from domestic bonds:
- Currency denomination: Issued in a currency different from the issuer’s home country, facilitating global capital access.
- International issuance: Typically issued in financial centers like London or Tokyo, enhancing market liquidity (Tokyo is a key trading hub).
- Variety of types: Includes fixed-rate, floating-rate, and zero-coupon bonds offering diverse investment options.
- Liquidity: Eurobonds generally have high liquidity due to their international investor base and standardized terms.
- Bearer or registered form: Historically issued as bearer bonds, though registered forms are increasingly common for transparency.
How It Works
Issuers, such as corporations or governments, work with investment banks to underwrite and distribute Eurobonds internationally. The bonds are sold to investors in markets outside the issuer’s domestic jurisdiction, often to avoid restrictive regulations or taxes.
Payments of interest and principal are made in the bond’s currency, requiring issuers to manage currency risks carefully. Investors benefit from access to foreign currency yields and diversification, often using valuation methods like discounted cash flow (DCF) to assess bond value.
Examples and Use Cases
Eurobonds serve various strategic financing needs for global entities:
- Airlines: Delta and American Airlines have issued Eurobonds to raise capital in US dollars while accessing foreign markets.
- Supranational organizations: Entities like the European Investment Bank issue Eurobonds to fund infrastructure projects across multiple countries.
- Emerging markets: Countries may issue zero-coupon Eurobonds to attract investors seeking long-term growth opportunities.
- Investors: You can diversify portfolios with Eurobonds or bond ETFs; consider best bond ETFs for accessible options.
Important Considerations
When dealing with Eurobonds, you should evaluate currency risk, regulatory environments, and tax implications. Issuers must ensure operational cash flows can cover payments in the bond’s currency, while investors should assess credit quality and market liquidity.
Understanding the nuances of different bond types, including baby bonds, can improve investment decisions. For a broader perspective, exploring low-cost index funds alongside bond investments can optimize your portfolio strategy.
Final Words
Eurobonds offer a flexible way to raise capital in foreign currencies, diversifying funding sources beyond domestic markets. Consider comparing terms and currency risks across Eurobond options to identify the best fit for your investment or financing needs.
Frequently Asked Questions
A Eurobond is a bond issued in a currency different from the country where it is issued. Despite the name, it doesn't necessarily involve Europe; for example, a bond issued in France but denominated in US dollars is a Eurobond.
Eurobonds can be issued by corporations, governments, and international organizations like the World Bank. Financial institutions, such as investment banks, usually handle the issuance process.
Eurobonds come in several forms including fixed-rate bonds, floating-rate notes, and zero-coupon bonds. Each type offers different interest payment structures to meet investors' needs.
Issuers prefer Eurobonds to access foreign currency capital, benefit from favorable regulatory environments, and achieve tax efficiency. These advantages make Eurobonds attractive for raising funds internationally.
Eurobonds are most commonly traded on the London Stock Exchange but can also be traded on exchanges in Singapore, Tokyo, and other financial centers, offering liquidity and flexibility to investors.
The first Eurobond was issued in 1963 by Italy's Autostrade to bypass the U.S. Interest Equalization Tax. This innovation helped investors avoid costly taxes and allowed access to U.S. capital from Europe.
A zero-coupon Eurobond is sold at a discount to its face value and does not pay periodic interest. Instead, investors earn returns from the difference between the purchase price and the amount paid at maturity.
