Eurodollar Bond
Definition
A Eurodollar bond is a type of bond that is issued outside of the United States but pays both interest and principal in U.S. dollars. These bonds are often utilized by foreign governments, corporations, and financial institutions to raise capital without the restrictions and regulations imposed by U.S. domestic markets.
Examples
- Corporate Issuance: A European corporation could issue Eurodollar bonds to attract U.S. dollar investments without having to comply with U.S. securities regulations.
- Sovereign Issuance: A foreign government might issue Eurodollar bonds to take advantage of favorable interest rates and the liquidity of the U.S. dollar.
- Financial Institution Issuance: Foreign banks may issue Eurodollar bonds to U.S. investors to diversify their investor base and obtain funding in the world’s primary reserve currency.
Frequently Asked Questions (FAQs)
Q1: What is the primary advantage of issuing Eurodollar bonds? A1: The main advantage is access to the large and liquid U.S. dollar market, which can result in lower borrowing costs compared to other currencies.
Q2: Are Eurodollar bonds regulated by the U.S. Securities and Exchange Commission (SEC)? A2: No, Eurodollar bonds are issued outside the United States and are not subject to SEC regulations.
Q3: Who typically invests in Eurodollar bonds? A3: Institutional investors such as mutual funds, pension funds, and hedge funds, as well as individual investors seeking exposure to U.S. dollar-denominated assets.
Q4: How does currency exchange rate risk affect Eurodollar bonds? A4: Since Eurodollar bonds are denominated in U.S. dollars, investors are exposed to exchange rate risk if their home currency is different from the U.S. dollar.
Q5: Can U.S. corporations issue Eurodollar bonds? A5: Yes, U.S. corporations can issue Eurodollar bonds through their foreign subsidiaries to tap into the international capital markets.
Related Terms
- Eurodollars: U.S. dollars held in banks outside the United States, which can be used for international transactions.
- Foreign Bond: A bond issued in a domestic market by a foreign entity in the domestic market’s currency.
- Domestic Bond: A bond issued and traded within the issuer’s country and denominated in the country’s currency.
- Eurobond: A bond issued in the international market denominated in a currency not native to the country where it is issued.
Online References
- Investopedia - Eurodollar Bond
- Federal Reserve Bank of New York - Eurodollars
- SEC - Foreign Issuer Guide
Suggested Books for Further Studies
- “The Bond Book: Everything Investors Need to Know About Treasuries, Munis, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau.
- “Bonds: An Introduction to the Core Concepts” by John Gillingham.
- “International Bond Markets: Analysis and Strategies” by Frank J. Fabozzi.
- “The Handbook of European Fixed Income Securities” by Frank J. Fabozzi, Moorad Choudhry, and Peter Hedges.
Fundamentals of Eurodollar Bond: International Finance Basics Quiz
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