Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
7Chapter SevenInternational Bond Market
Chapter Objective:
This chapter continues discussion of international
capital markets with a discussion of the structure of
the international bond market.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Outline
? The World’s Bond Markets,A Statistical
Perspective
? Foreign Bonds and Eurobonds
? Types of Instruments
? Currency Distribution,Nationality,Type of Issuer
? International Bond Market Credit Ratings
? Eurobond Market Structure & Practices
? International Bond Market Indices
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
The World’s Bond Markets
? A statistical perspective:
? The total market value of the world’s bond
markets are about 50% larger than the world’s
equity markets.
? Most issues are denominated in U.S,dollars,
Japanese Yen are second,followed by
Deutchmarks in a distant third.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
A Statistical Perspective:
Dom estic Internationa l T ota l
$ 47,8% 45,1% 47,5%
￥ 18,0% 11,7% 17,2%
DM 7.0% 10,3% 7.4%
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Foreign Bonds and Eurobonds
? Bearer Bonds and Registered Bonds
? National Security Registrations
? Withholding Taxes
? Recent Regulatory Changes
? Global Bonds
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Bearer Bonds and
Registered Bonds
? Bearer Bonds are bonds with no registered owner,
As such they offer anonymity but they also offer
the same risk of loss as currency.
? Registered Bonds,the owners name is registered
with the issuer.
? U.S,security laws require Yankee bonds sold to
U.S,citizens to be registered.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
National Security Registrations
? Yankee bonds must meet the requirements of the
SEC,just like U.S,domestic bonds.
? Many borrowers find this level of regulation
burdensome and prefer to raise U.S,dollars in the
Eurobond market.
? Eurobonds sold in the primary market in the
United States may not be sold to U.S,citizens.
? Of course,a U.S,citizen could buy a Eurobond on
the secondary market.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Withholding Taxes
? Prior to 1984,the United States required a 30
percent withholding tax on interest paid to
nonresidents who held U.S,government or U.S,
corporate bonds.
? The repeal of this tax led to a substantial shift in
the relative yields on U.S,government and
Eurodollar bonds.
? This lends credence to the notion that market
participants react to tax code changes.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Recent Regulatory Changes
? Shelf Registration (SEC Rule 415)
? Allows the issuer to preregister a securities issue,and
then offer the securities when the financing is actually
needed.
? SEC Rule 144A
? Allows qualified institutional investors to trade private
placements.
? These issues do not have to meet the strict information
disclosure requirements of publicly traded issues.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Global Bonds
? A global bond is a very large international bond
offering by a single borrower that is
simultaneously sold in North America,Europe
and Asia.
? Mostly institutional investors are the purchasers so
far.
? SEC Rule 415 and 144A have likely facilitated
global bond offerings,and more can be expected
in the future.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Types of Instruments
? Straight Fixed Rate Debt
? Floating-Rate Notes
? Equity-Related Bonds
? Zero Coupon Bonds
? Dual-Currency Bonds
? Composite Currency Bonds
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Straight Fixed Rate Debt
? These are,plain vanilla” bonds with a specified
coupon rate and maturity and no options attached.
? Since most Eurobonds are bearer bonds,coupon
dates tend to be annual rather than semi-annual.
? The vast majority of new international bond
offerings are straight fixed-rate issues.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Floating-Rate Notes
? Just like an adjustable rate mortgage.
? Common reference rates are 3-month and 6-month
U.S,dollar LIBOR
? Since FRN reset every 6 or 12 months,the
premium or discount is usually quite small… as
long as there is no change in the default risk.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Equity-Related Bonds
? Convertibles
? Convertible bonds allow the holder to surrender his
bond in exchange for a specified number of shares in
the firm of the issuer.
? Bonds with equity warrants
? These bonds allow the holder to keep his bond but still
buy a specified number of shares in the firm of the
issuer at a specified price.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Zero Coupon Bonds
? Zeros are sold at a large discount from face value
because there is no cash flow until maturity.
? In the U.S.,investors in zeros owe taxes on the
“imputed income” represented by the increase in
present value each year,while in Japan,the gain is
a tax-free capital gain.
? Pricing is very straightforward:
Tr
P A RPV
)1( ?
?
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Dual-Currency Bonds
? A straight fixed-rate bond,with
interest paid in one currency,and
principal in another currency.
? Japanese firms have been big issuers with coupons
in yen and principal in dollars.
? Good option for a MNC financing a foreign
subsidiary.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Composite Currency Bonds
? Denominated in a currency basket,like the SDRs
or ECUs instead of a single currency.
? Often called currency cocktail bonds.
? Typically straight fixed rate debt.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Instrument
Straight Fixed-Rate
Floating Rate Note
Convertible Bond Annual Fixed Currency of issue
or conversion to
equity shares.
Straight fixed rate
with equity warrants
Annual Fixed Currency of issue
plus conversion to
equity shares.
Zero none zero Currency of issue
Dual Currency Bond Annual Fixed Dual currency
Composite Currency
Bond
Annual Fixed Composite currency
of issue
Frequency of Payment
Annual
Size of Coupon Payoff at Maturity
Characteristics of International Bond
Market Instruments
Currency of issueFixed
Every 3 or 6 months Variable Currency of issue
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Currency Distribution of
International Bond Offerings
Currency 1997
U.S,dollar 45%
Deutsche mark 16.8
Yen 4.5
Pound Sterling 8.9
Swiss franc 2.6
Italian lira 5.4
French franc 6.4
Other 10.4
Total 100
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Distribution of International Bond
Offerings by Nationality
Nationality 1997 (U.S,$b)
Australia 13.4
Canada 22.8
France 43.6
Germany 152.1
Italy 16.1
Japan 41.6
Sweden 15.4
United Kingdom 52.2
United States 189.3
Other OECD countries 170.6
Non-OECD countries 85.9
International Development
Organizations
28.9
Total 831.6
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Distribution of International Bond
Offerings by Type of Issuer
Type of Issuer 1997
(U.S,$ Billion)
Governments 97.5
Public enterprises 83.6
Banks 293.0
Private organizations 301.2
International organizations 56.3
Total 831.6
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Bond Market
Credit Ratings
? Fitch IBCA,Moody’s and Standard & Poor’s
sell credit rating analysis.
? Focus on default risk,not exchange rate risk.
? Assessing sovereign debt focuses on political
risk and economic risk.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Eurobond Market Structure
? Primary Market
? Very similar to U.S,underwriting.
? Secondary Market
? OTC market centered in London.
?Comprised of market makers as well as brokers.
?Market makers and brokers are members of the International
Securities Market Association (ISMA).
? Clearing Procedures
? Euroclear and Cedel handle most Eurobond trades.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Bond Market Indices
? There are several international bond market
indices.
? J.P,Morgan and Company
? Domestic Bond Indices
? International Government bond index for 18 countries.
? Widely referenced and often used as a benchmark.
? Appears daily in The Wall Street Journal
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
End Chapter Seven
reserved,
INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
7Chapter SevenInternational Bond Market
Chapter Objective:
This chapter continues discussion of international
capital markets with a discussion of the structure of
the international bond market.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Outline
? The World’s Bond Markets,A Statistical
Perspective
? Foreign Bonds and Eurobonds
? Types of Instruments
? Currency Distribution,Nationality,Type of Issuer
? International Bond Market Credit Ratings
? Eurobond Market Structure & Practices
? International Bond Market Indices
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
The World’s Bond Markets
? A statistical perspective:
? The total market value of the world’s bond
markets are about 50% larger than the world’s
equity markets.
? Most issues are denominated in U.S,dollars,
Japanese Yen are second,followed by
Deutchmarks in a distant third.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
A Statistical Perspective:
Dom estic Internationa l T ota l
$ 47,8% 45,1% 47,5%
￥ 18,0% 11,7% 17,2%
DM 7.0% 10,3% 7.4%
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Foreign Bonds and Eurobonds
? Bearer Bonds and Registered Bonds
? National Security Registrations
? Withholding Taxes
? Recent Regulatory Changes
? Global Bonds
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Bearer Bonds and
Registered Bonds
? Bearer Bonds are bonds with no registered owner,
As such they offer anonymity but they also offer
the same risk of loss as currency.
? Registered Bonds,the owners name is registered
with the issuer.
? U.S,security laws require Yankee bonds sold to
U.S,citizens to be registered.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
National Security Registrations
? Yankee bonds must meet the requirements of the
SEC,just like U.S,domestic bonds.
? Many borrowers find this level of regulation
burdensome and prefer to raise U.S,dollars in the
Eurobond market.
? Eurobonds sold in the primary market in the
United States may not be sold to U.S,citizens.
? Of course,a U.S,citizen could buy a Eurobond on
the secondary market.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Withholding Taxes
? Prior to 1984,the United States required a 30
percent withholding tax on interest paid to
nonresidents who held U.S,government or U.S,
corporate bonds.
? The repeal of this tax led to a substantial shift in
the relative yields on U.S,government and
Eurodollar bonds.
? This lends credence to the notion that market
participants react to tax code changes.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Recent Regulatory Changes
? Shelf Registration (SEC Rule 415)
? Allows the issuer to preregister a securities issue,and
then offer the securities when the financing is actually
needed.
? SEC Rule 144A
? Allows qualified institutional investors to trade private
placements.
? These issues do not have to meet the strict information
disclosure requirements of publicly traded issues.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Global Bonds
? A global bond is a very large international bond
offering by a single borrower that is
simultaneously sold in North America,Europe
and Asia.
? Mostly institutional investors are the purchasers so
far.
? SEC Rule 415 and 144A have likely facilitated
global bond offerings,and more can be expected
in the future.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Types of Instruments
? Straight Fixed Rate Debt
? Floating-Rate Notes
? Equity-Related Bonds
? Zero Coupon Bonds
? Dual-Currency Bonds
? Composite Currency Bonds
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Straight Fixed Rate Debt
? These are,plain vanilla” bonds with a specified
coupon rate and maturity and no options attached.
? Since most Eurobonds are bearer bonds,coupon
dates tend to be annual rather than semi-annual.
? The vast majority of new international bond
offerings are straight fixed-rate issues.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Floating-Rate Notes
? Just like an adjustable rate mortgage.
? Common reference rates are 3-month and 6-month
U.S,dollar LIBOR
? Since FRN reset every 6 or 12 months,the
premium or discount is usually quite small… as
long as there is no change in the default risk.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Equity-Related Bonds
? Convertibles
? Convertible bonds allow the holder to surrender his
bond in exchange for a specified number of shares in
the firm of the issuer.
? Bonds with equity warrants
? These bonds allow the holder to keep his bond but still
buy a specified number of shares in the firm of the
issuer at a specified price.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Zero Coupon Bonds
? Zeros are sold at a large discount from face value
because there is no cash flow until maturity.
? In the U.S.,investors in zeros owe taxes on the
“imputed income” represented by the increase in
present value each year,while in Japan,the gain is
a tax-free capital gain.
? Pricing is very straightforward:
Tr
P A RPV
)1( ?
?
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Dual-Currency Bonds
? A straight fixed-rate bond,with
interest paid in one currency,and
principal in another currency.
? Japanese firms have been big issuers with coupons
in yen and principal in dollars.
? Good option for a MNC financing a foreign
subsidiary.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Composite Currency Bonds
? Denominated in a currency basket,like the SDRs
or ECUs instead of a single currency.
? Often called currency cocktail bonds.
? Typically straight fixed rate debt.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Instrument
Straight Fixed-Rate
Floating Rate Note
Convertible Bond Annual Fixed Currency of issue
or conversion to
equity shares.
Straight fixed rate
with equity warrants
Annual Fixed Currency of issue
plus conversion to
equity shares.
Zero none zero Currency of issue
Dual Currency Bond Annual Fixed Dual currency
Composite Currency
Bond
Annual Fixed Composite currency
of issue
Frequency of Payment
Annual
Size of Coupon Payoff at Maturity
Characteristics of International Bond
Market Instruments
Currency of issueFixed
Every 3 or 6 months Variable Currency of issue
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Currency Distribution of
International Bond Offerings
Currency 1997
U.S,dollar 45%
Deutsche mark 16.8
Yen 4.5
Pound Sterling 8.9
Swiss franc 2.6
Italian lira 5.4
French franc 6.4
Other 10.4
Total 100
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Distribution of International Bond
Offerings by Nationality
Nationality 1997 (U.S,$b)
Australia 13.4
Canada 22.8
France 43.6
Germany 152.1
Italy 16.1
Japan 41.6
Sweden 15.4
United Kingdom 52.2
United States 189.3
Other OECD countries 170.6
Non-OECD countries 85.9
International Development
Organizations
28.9
Total 831.6
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Distribution of International Bond
Offerings by Type of Issuer
Type of Issuer 1997
(U.S,$ Billion)
Governments 97.5
Public enterprises 83.6
Banks 293.0
Private organizations 301.2
International organizations 56.3
Total 831.6
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Bond Market
Credit Ratings
? Fitch IBCA,Moody’s and Standard & Poor’s
sell credit rating analysis.
? Focus on default risk,not exchange rate risk.
? Assessing sovereign debt focuses on political
risk and economic risk.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Eurobond Market Structure
? Primary Market
? Very similar to U.S,underwriting.
? Secondary Market
? OTC market centered in London.
?Comprised of market makers as well as brokers.
?Market makers and brokers are members of the International
Securities Market Association (ISMA).
? Clearing Procedures
? Euroclear and Cedel handle most Eurobond trades.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Bond Market Indices
? There are several international bond market
indices.
? J.P,Morgan and Company
? Domestic Bond Indices
? International Government bond index for 18 countries.
? Widely referenced and often used as a benchmark.
? Appears daily in The Wall Street Journal
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
End Chapter Seven
