Definition
A Eurobond is a type of bond that is issued in a currency different from the currency of the country in which it is issued. Specifically, these bonds are denominated in a eurocurrency, which refers to any currency held in banks outside its country of origin. Eurobonds are a popular financial instrument because they offer a way for corporations and governments to raise large sums of capital in international markets with fewer regulatory constraints compared to domestic bonds.
Key Characteristics:
- Bearer Securities: Originally issued as bearer bonds, where the holder is considered the owner, enhancing anonymity and potentially providing tax benefits.
- Global Reach: Issued primarily in financial centers like London by syndicates of international banks.
- Types of Eurobonds:
- Straight Bonds: Fixed-interest bonds with a duration of three to eight years.
- Floating-Rate Notes (FRNs): Bonds with a variable interest rate, typically linked to the London Interbank Offered Rate (LIBOR).
- Perpetual Bonds: Bonds that are not redeemed and continue indefinitely.
- Bonds with Warrants: Bonds that come with options (warrants) to purchase shares in the issuing company.
- Convertibles: Bonds that can be converted into a predetermined number of the issuer’s equity shares.
- Eurosterling bonds: Eurobonds denominated in British pounds.
Examples
- Corporate Eurobond: A multinational corporation issued a five-year Eurobond denominated in euros to raise $500 million for expansion outside of its home country.
- Government Eurobond: A government issued a Eurobond in dollars to attract international investors and diversify its funding sources.
- Convertible Eurobond: A tech company issued a convertible Eurobond, allowing bondholders to convert bonds into the company’s stock when certain conditions are met.
Frequently Asked Questions
What is the main advantage of issuing Eurobonds?
Eurobonds provide issuers access to international capital markets, allowing them to borrow in a currency that might have lower interest rates and less stringent regulatory requirements.
How is interest handled in Eurobonds?
Interest can be fixed or variable. Fixed-rate bonds pay a set interest rate over the bond’s lifetime, while floating-rate notes adjust the interest rate periodically based on an index like LIBOR.
Are Eurobonds secure investments?
Eurobonds can be considered secure investments if they are issued by reputable entities, but, like all investments, they carry risk. Investors must consider the creditworthiness of the issuer and currency risks.
Are there any tax benefits associated with Eurobonds?
Historically, Eurobonds were often bearer securities, providing anonymity and potential tax advantages. However, modern electronic clearing systems have somewhat diminished these benefits.
Can Eurobonds be traded in secondary markets?
Yes, Eurobonds are actively traded in secondary markets, enhancing their liquidity and making them attractive to investors.
Related Terms
Eurocurrency: Any currency deposited outside its country of origin, such as US dollars held in European banks.
Bearer Security: A security not registered in the name of the owner and therefore the holder is presumed to be the owner.
Floating-Rate Note (FRN): A bond with an interest rate that varies based on a benchmark index, such as LIBOR.
Perpetual Bond: A bond with no maturity date that pays interest indefinitely.
Warrant: A financial instrument that confers the right, but not the obligation, to purchase a company’s stock at a specific price before expiration.
Convertible Bond: A bond that can be converted into a set number of shares of the issuing company’s stock.
London Interbank Offered Rate (LIBOR): The average interest rate at which major global banks lend to one another.
Online References
- Eurobond - Investopedia
- European Central Bank -Eurobond Markets
- International Capital Market Association (ICMA)
Suggested Books for Further Studies
- “International Finance” by Keith Pilbeam
- “The Bond Bible” by Marilyn Cohen and Christopher R. Malburg
- “Fixed Income Analysis” by Barbara S. Petitt
- “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
- “The Handbook of European Fixed Income Securities” by Frank J. Fabozzi and Moorad Choudhry
Accounting Basics: “Eurobond” Fundamentals Quiz
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