6_international bond market

8/8/2019 6_international Bond Market

1/19

INTERNATIONAL BOND

MARKET


2/19

Previewy The Worlds Bond Markets: A Statistical Perspective

y Foreign Bonds and Eurobonds

y

Types of Instrumentsy Currency Distribution, Nationality, Type of Issuer

y International Bond Market Credit Ratings

y Eurobond Market Structure & Practices

y International Bond Market Indices


3/19

The Worlds Bond Markets:

A StatisticalPerspective:

y The total market value of the worlds bond markets areabout 50% largerthan the worlds equity markets.

y Most issues are denominated in U.S. dollars, euro andJapanese yen.


4/19

A StatisticalPerspective:Currency (U.S. $ billions) Percent

U.S. Dollar 22,423.2 43.6

Euro 13,270.9 25.8

Yen 8,633.6 16.8

Other 7,068.1 13.8

Total 51,395.8 100


5/19

Amounts of Domestic and International Bonds

Outstanding

Curre c mestic I ter ati al tal

U.S. d llar $17,930.7 $ 4,492.5 $ 22,423.2

Eur $ 8,436.4 $ 4,834.5 $ 13,270.9

P und $ 1,274.6 $ 778.7 $ 2,053.3

Yen $ 8,145.0 $ 488.6 $ 8,633.6

Other $ 4,506.6 $ 508.2 $ 5,014.8

tal $40,293.3 $ 11,102.5 $ 51,395.8

(As of Year-End 2004 in U.S. $Billions); Latest figures of Year-End 2009 in the Hand-out


6/19

Amounts of Domestic and International Bonds

Outstanding

$-

$10,000.0

$20,000.0

$30,000.0

$40,000.0

$50,000.0

U.S.

dollar

Euro Pound Yen Other Total

Domestic

International

Total

(As of Year-End 2004 in U.S. $Billions)


7/19

Foreign Bonds and Eurobonds

y Bearer Bonds and Registered Bonds

y National Security Registrations

yWithholding Taxes

y Global Bonds


8/19

Bearer Bonds and Registered

Bonds

y Bearer Bonds are bonds with no registered owner. As

such they offer anonymity but they also offer the samerisk of loss as currency.

y Registered Bonds: the owners name is registered withthe issuer.

y

U.S. security laws require Yankee bonds sold to U.S.citizens to be registered.


9/19

National Security RegistrationsyYankee bonds must meet the requirements of the SEC,

just like U.S. domestic bonds.

y Many borrowers find this level of regulationburdensome and prefer to raise U.S. dollars in theEurobond market.

y Eurobonds sold in the primary market in the United

States may not be sold to U.S. citizens.y Of course, a U.S. citizen could buy a Eurobond on the

secondary market.


10/19

Withholding Taxesy 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.y The repeal of this tax led to a substantial shift in the

relative yields on U.S. government and Eurodollarbonds.

y

This lends credence to the notion that marketparticipants react to tax code changes.


11/19

Global BondsyA global bond is a very large international bond

offering by a single borrower that is simultaneously

sold in North America, Europe and Asia.y Global bonds denominated in U.S. dollars and issued

by U.S. corporations trade as Eurobonds overseas anddomestic bonds in the U.S.


12/19

Types of Instrumentsy Straight Fixed Rate Debt

y Floating-Rate Notes

y Equity-Related Bondsy Zero Coupon Bonds

y Dual-Currency Bonds

y Composite Currency Bonds


13/19

StraightFixed Rate Debty These are plain vanilla bonds with a specified coupon

rate and maturity and no options attached.

ySince most Eurobonds are bearerbonds, coupon datestend to be annual rather than semi-annual.

y The vast majority of new international bond offeringsare straight fixed-rate issues.


14/19

Floating-Rate NotesyJust like an adjustable rate mortgage.

y Common reference rates are 3-month and 6-month

U.S. dollar LIBORy Since FRN reset every 6 or 12 months, the premium or

discount is usually quite small


15/19

Equity-Related Bondsy Convertibles

y Convertible bonds allow the holder to surrender his

bond in exchange for a specified number of shares in thefirm of the issuer.

y Bonds with equity warrants

y These bonds allow the holder to keep his bond but still

buy a specified number of shares in the firm of the issuerat a specified price.


16/19

Zero Coupon Bondsy Zeros are sold at a large discount from face value

because there is no cash flow until maturity.

y In the U.S., investors in zeros owe taxes on theimputed income represented by the increase inpresent value each year, while in Japan, the gain isa tax-free capital gain.

y Pricing is very straightforward:PV=

PAR

(1 + r)T


17/19

Dual-Currency BondsyA straight fixed-rate bond, with

interest paid in one currency, and

principal in another currency.yJapanese firms have been big issuers with coupons in

yen and principal in dollars.

y Good option for a MNC financing a foreign subsidiary.


18/19

Composite Currency Bondsy Denominated in a currency basket, like the SDRs or

ECUs instead of a single currency.

y

Often called currencycocktailbonds.y Typically straight fixed rate debt.


19/19

International Bond Market

Credit Ratings

y Fitch IBCA, Moodys and Standard & Poors sell credit

rating analysis.y Focus on default risk, not exchange rate risk.

yAssessing sovereign debt focuses on political risk andeconomic risk.

6_international bond market

Documents