Eurobond: An Overview and How Does It Works?

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Triston Martin

Dec 17, 2021

Debt instruments denominated in a currency other than the country or market in which they are issued called Eurobonds. According to the currency in which they are denominated, Eurodollar or Euro-yen bonds might be grouped. Eurobonds are commonly referred to as external bonds because they are issued in a foreign currency. With Eurobonds, businesses can raise cash while also publishing it in a different currency.


Typically, a multinational consortium of financial institutions handles the issue of Eurobonds on behalf of the borrower, with one institution underwriting the bond and thereby guaranteeing that it will be purchased in its entirety.


Eurobonds: An Introduction


Since issuers can pick the country where their Eurobonds will be issued based on factors such as regulatory framework, interest rates, and market depth, they have proven to be a popular financing option. Investors like them because they have low par values or face values, which means they're a low-risk investment option.


Because of their high liquidity, Eurobonds can be quickly purchased and sold. When a bond is described as a "Eurobond," it means that it is not issued in Europe or has a euro-denominated value; it does not refer to the country from which the bond was issued. Eurobonds can be given in US dollars in Japan, for example.



Background


Autostrade, the Italian national railroads' operating business, issued the first Eurobond in 1963. Bankers in London designed the $15 million eurodollar bond, which was published at Amsterdam Airport Schiphol and paid in Luxembourg to lower taxes. " It was a safe, dollar-denominated investment option for European investors.


Multinational enterprises, sovereign countries, and supranational organisations are all examples of issuers. A single bond issuance can be more than a billion dollars, with maturities ranging from five to 30 years, but most of the bonds have a shorter term. Eurobonds offer a wide range of investment opportunities to both issuers and investors in nations with a small capital market.


Delivery


The earliest Eurobonds were delivered to investors in the form of paper certificates. Depository Trust Company (DTC) in the US and the Certificateless Registry for Electronic Share Transfer (CREST) in the UK provide electronic certificates for various financial instruments and transactions.


Because Eurobonds are typically issued in bearer form, investors can dodge laws and taxes by acquiring them directly. You don't have a record of ownership if the bond is issued in bearer form. To prove ownership, the bond must be held in one's hands.


Size of the Industry


More than $100 trillion in debt is held by investors worldwide. Because so many Eurobonds are unregistered and traded in bearer form, it's impossible to have exact figures on the size of this market, but it's safe to assume that it makes up around 30% of the total. Emerging-market governments and corporations are issuing increasing Eurobonds to seek to borrow from more established markets with greater depth and development.


How Do Eurobonds Operate?


The premise of Eurobonds is that a firm can issue bonds in any country based on the country's economic and regulatory climate (e.g., interest rates in the country, economic cycle, market sizes, etc.). Because the bonds have a low notional value (also known as the "face value" or "par value"), they appeal to investors because they are very inexpensive to buy.


Because Eurobonds can be turned into cash within one fiscal year, they are precious. Eurobonds are classified according to the currency they were issued in. There will be no distinction between Eurobonds issued in British pounds and Euro-pound bonds issued by a US-based corporation. This is how the operating of Eurobonds is done.


Eurobonds Are Issued By Who?


Eurobonds are an excellent option for private businesses, international groups, and even governments who need a specific amount of foreign currency for a particular period. In most cases, interest rates on Eurobonds are fixed, even if they are issued for a lengthy time.



The Issuer's Favors from Eurobonds


Eurobonds have several advantages over domestic bonds for this type of project:


  • Bonds can be issued in any country and any currency, depending on the intended usage.


  • By selecting a country with a lower interest rate than its own, the issuer can save money on borrowing.


  • Certain types of investors prefer Eurobonds above other types of bonds. Many British citizens with Indian, Pakistani, or Bangladeshi ancestry think investing in their home countries is a good idea.


  • The company reduces forex risk. However, the firm might have issued domestic bonds in US dollars, converted them into Indian rupees, and then paid interest to investors by exchanging rupees for US dollars in the Indian rupee market.


There are additional fees and risks associated with this approach.


  • Even though Eurobonds are issued in a particular country, they are traded worldwide, which helps to attract a wide range of investors.


Investors Can Reap The Rewards Of Eurobonds


In terms of diversity, Eurobonds can be a good option for investors. Their money is going into a well-known and well-respected local business entering a new market. It is also worth noting that the Eurobonds are issued in foreign currencies but only launched in countries with strong currencies.


For their local investors, this keeps them highly liquid. Suppose 10,000 Indian rupees is the par value of an Indian rupee Eurodollar bond issued in the United Kingdom. In that case, it will cost a British investor the equivalent of around 104 British pounds.


Conclusion


In this lesson, we examined the differences between Eurobonds and conventional bonds. Some of the benefits they provide to issuers of Eurobonds and investors are also be discussed. Hence this type of bond is called a Eurobond because it's issued in a currency other than its national currency. As a result, it's a rare breed of a bind.


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