What is a Eurobond?
A Eurobond is a financial instrument used by companies, institutions and governments to borrow money from international investors. The specific Eurobond can be denominated either in the issuing entity’s domestic currency or in another currency, usually the U.S. dollar or the Euro. For both government bonds and corporate bonds the term “Eurobond” generally refers to an international bond denominated in a currency of a country other than in the issuer’s home currency.
What are the Advantages of a Eurobond?
These unique financial instruments offer several benefits to global borrowers. Here are the biggest advantages of Eurobonds:
• Ability to access a larger, global pool of investors: Eurobonds are usually part of a larger global bond portfolio. This makes it easier for issuers to tap into a bigger pool of potential investors that may be located both inside and outside of their home country. This also helps to diversify the issuer’s revenue sources.
• There may be less regulatory oversight: Eurobonds don’t have to comply with local regulations or listing requirements in the country of issuance. This helps to reduce costs associated with issuing the bond and allows the issuer to access different markets quicker.
• Lower borrowing costs: Issuing a Eurobond may be cheaper than issuing a local bond due to the lack of regulatory oversight. This can lead to lower borrowing costs, ultimately helping to save issuers money.
• Flexible structure: Eurobonds can be structured in a variety of ways to meet the needs of both the issuer and the investor.
How Does a Eurobond Work?
The issuance and sale of Eurobonds begins with the issuer. The issuer identifies the type of security it would like to issue and the terms and conditions it is offering to investors. It is then the issuer’s responsibility to structure the Eurobond and ensure that it meets all of the legal requirements for its issuance and sale.
Once the terms and conditions of the bond issue have been established and approved, the bond can be issued, usually on the financial markets of London, Tokyo, and Zurich. The bond can then be sold on the open market. It is important to note that the bond is not sold directly to investors, but instead is sold through a bond broker or specialist who acts as an intermediary between the issuer and investors.
The bond broker who acts as the issuer’s agent is responsible for the distribution of the bond and advertising its features and benefits to potential investors. The broker will work to identify potential buyers, negotiate bond prices, and facilitate the purchase process of the bond.
What are the Different Types of Eurobonds?
Eurobonds can take many forms and cater to a wide variety of different investors and financial objectives. Here are some of the most common types of Eurobonds:
• Sovereign bonds: These are bond instruments issued by national governments and are backed by the full faith and credit of the issuing government.
• Corporate bonds: Bonds issued by companies are usually referred to as corporate bonds. These bonds are generally unsecured, meaning that they do not have any specific collateral or guarantee of repayment.
• Zero-coupon bonds: Zero-coupon bonds, also known as zero-coupon debt instruments, are bonds that do not pay interest throughout their life, instead providing investors with one lump sum of principle plus interest upon maturity.
• Eurobonds with call and put options: Call and put options are special features of a bond which allow the issuer or investor to buy or sell the bond on predetermined terms. Call and put options are useful for providing issuers with an early exit provision and investors with the ability to adjust their portfolio risk.
• Convertible bonds: Convertible bonds are hybrid securities that can be exchanged for a predetermined quantity of the issuer’s common stock over a predetermined time period. They offer investors the ability to make higher returns in a short amount of time.
Are Eurobonds Risky Investments?
Eurobonds are not inherently risky investments. As with any other investment, however, there are risks associated with Eurobonds. For example, the issuer of the bond must be able to pay back the principal plus interest. If the issuer defaults, investors will incur a loss. Inflationary risks may also exist, as the pricing of bonds is directly tied to the prevailing market interest rates.
Furthermore, default risks can increase significantly if the Eurobond is not issued in the issuer’s own currency. Currency risk is the risk that the bond’s value will decline due to fluctuations in the exchange rate. All of these risks must be taken into consideration when investing in Eurobonds.
Eurobonds are an important financial instrument used by global companies, institutions, and governments to access global capital markets. They offer several advantages in terms of cost, flexibility, and access to a larger investor base. However, their use also comes with certain risks that investors must be aware of, such as default risks and currency risks. Ultimately, Eurobonds can be an attractive way to raise capital if they are issued and managed properly.
