What Is A Eurobond?
A eurobond refers to a bond issued in a country in a currency different from its legal tender. It acts as a fixed-income debt instrument or security in the eurocurrency market and comes with a maturity of 5-30 years. These bonds carry lower interest rates and zero forex risk.
It, thus, allows corporations to raise capital in the foreign currency to expand internationally. The word euro in the term stands for the external currency in which the bond gets denominated. Hence, it is also known as an external bond and gets its name from that particular currency. For example, an external bond issued in the Japanese yen in the United States will be a Euroyen bond.
- Eurobond definition depicts a bond made available in a currency that is not native to the nation in which it is gets introduced. It gets its name from the external currency it is denominated in and hence also known as external bonds.
- The Italian motorway construction company Autostrade first issued external bonds in eurodollars worth $15 million in 1963.
- Eurobonds get introduced in one country but traded globally, giving investors diverse investment opportunities.
- An external bond differs from a foreign bond. The latter is made available in the native currency of the country in which it gets issued.
How Does Eurobond Work?
Eurobonds attract companies with a small capital marketCapital MarketA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets. and provide investors diverse investment opportunities due to small face values. Though the term has the word “euro” in it, it has nothing to do with Europe or its currency. It derives its name from the eurocurrency in which the bond gets denominated, such as eurodollar, euroyen, europound bonds, etc. Also, it is distinct from Eurobond, beginning with the capital letter ‘E,’ issued by the European Union and Eurozone countries.
In 1963, the Italian motorway construction company Autostrade first issued 15-year eurobonds in eurodollars worth $15 million. The London-based investment bank S.G. Warburg & Co. arranged these dollar-denominated investments. Eventually, it helped European investors reduce the interest equalization tax in the United States.
Entities in need of foreign-denominated debt at a fixed interest rate for a specific period issue these bonds. Such entities can be private organizations, global syndicates of financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. , and governments. They introduce these bonds in any country but in a currency that is non-native to it. An external bond issued in Japanese yen in the United States by an Australian company is the perfect eurobond example of a eurodollar bond.
These bonds are highly liquid and available for purchase through international stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.. Also, these bonds are exempt from withholding taxWithholding TaxWithholding tax is a part of the salary an employer withholds from an employee's compensation and pays to the legal authorities. It is treated as collateral imposed against the taxes an employee is liable to pay during a particular year., disclosure requirements, and ownership records, regardless of country or currency denomination. While an external bond enables the issuer to choose the country and currency of issuance, borrowers must pay a fixed interest rate.
To understand how eurobond works, let us consider the following examples:
Assume a British corporation wants to start a new business in Canada and needs a large sum of money in the local currency, i.e., Canadian dollars. Because the firm does not have adequate funds in the requisite fiat money, it considers borrowing the funds from Canada. It realizes, however, that the cost of borrowing would be too high.
Soon, it learns about the Canadian immigrant population in Japan and introduces Canadian dollar-denominated external bonds to the Japanese market. Investors in Japan who have Canadian dollars in their bank accounts invest in the eurobond market and buy bonds in exchange for those dollars. As a result, it enables the British company to obtain lower-cost financing to establish the venture in Canada.
Senegal, Rwanda, and South Africa have recently sought investors to assist in the coronavirus vaccine development in Africa. With over 1.3 billion people, the continent has only managed to vaccinate roughly 1% of them against the deadly virus.
Even though governments are in discussions with partners to get funds, they are also considering external bonds to obtain financing to pay vaccine manufacturers.
Banks and financial institutions hold more eurodollar futures than crypto futures. This lowering percentage of banks holding crypto futures is due to the higher consumption of eurodollar futures by pension fundsPension FundsA pension fund refers to any plan or scheme set up by an employer which generates regular income for employees after their retirement. This pooled contribution from the pension plan is invested conservatively in government securities, blue-chip stocks, and investment-grade bonds to ensure that it generates sufficient returns..
Crypto derivatives are less trusted and hence are less consumed. Eurobond derivatives are becoming increasingly popular due to the trading flexibility and interest benefits they offer to issuers and investors.
The eurocurrency debt instrumentDebt InstrumentDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans., i.e., eurobond, involves two parties – the issuer and the borrower. Hence, the set of benefits offered by these external bonds are different for both:
|For Issuers||For Investors|
|Have the option of issuing these bonds in the desired country and currency||Highly liquid for local investors|
|Raise low-interest capital/debt||Introduced in a non-native currency in a country with a higher currency value|
|Highly liquid and can be converted into cash within one fiscal year||Offers diverse investment opportunity|
|Reduced currency or Forex risks||Small par value/face value|
|Issued in one country but are traded globally||No associated tax withholding|
|Available at favorable interest rates||More leniently priced|
Eurobond vs Foreign bond
Eurobond is different from the foreign bond. Firstly, the former gets issued in a currency that is non-native to the nation in which it is made available. Whereas the latter gets introduced in the native currency of the country in which it is gets issued.
Secondly, external bonds are available for trading in countries other than the home country. Hence, no governmental regulations guide, control, supervise, or intervene in it. The foreign bonds, on the contrary, are managed and regulated by rules operating the national market.
Thirdly, external bonds get named after the eurocurrency in which they are denominated, for example, eurodollars, euroyen, euroyuan, etc. Foreign bonds have different names in different countries. For instance, they are:
- Yankee bondsYankee BondsA Yankee bond is a bond issued by a foreign entity, such as a bank or financial institution, and traded in US dollar currency in America. The Securities Act of 1933 governs these bonds, which involve a lot of paperwork and are rated by credit rating firms like Moody's and S&P. in the United States
- Matador bonds in Spain
- Rembrandt bonds in the Netherlands
- Samurai bonds in Japan
- Bulldog bonds in the United Kingdom
- Kiwi bonds in New Zealand
- Kangaroo bonds in Australia
- Maple bonds in Canada
- Panda bonds in China
Frequently Asked Questions (FAQs)
A eurobond is a fixed-income debt instrument available in a currency that is not native to the nation in which the issuer issues it. Also known as external bonds, these securities get introduced in the country and currency of choice. Usually, it derives its name from the eurocurrency in which it gets denominated.
The advantages of external bonds are:
– Issued in the desired country and currency
– Highly liquid
– Low-cost investment
– Introduced in a nation with higher currency value
– Reduced fiat money or Forex risk
– No associated tax withholding
– Traded globally
– Offer diverse investment opportunities
• Issued in a non-native currency
• Exempt from governmental regulations
• Named after the eurocurrency in which they get denominated, for example, eurodollars, euroyen, euroyuan, etc.
• Available in the native currency
• Managed and controlled by the rules operating the national market
• Have different names in different countries, for example, Yankee bonds in the United States, Kangaroo bonds in Australia, Bulldog bonds in the U.K., etc.
This has been a guide to Eurobond and its definition. Here we discuss how does euro bond works along with examples, benefits, and its differences from foreign bonds. You may also have a look at the following articles –