Finance

What are Eurobonds?

Eurobonds are interest-bearing securities denominated in a currency other than the home currency of the country or market in which it is issued. They are commonly issued by governments, corporations, and international organizations. These instruments often trade on an exchange and they trade much like other bonds. The Eurobond market is considered less liquid than the traditional bond market. Mostly coupon of Eurobonds is paid annually.

Eurobonds are usually bearer bonds which means that no transfer agent keeps a list of bondholders and arranges the interest and principal payments. Instead, holders receive interest when they present the coupon to the borrower, and receive the principal when the bond matures.

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Imagine that a Europe based company wants to expand into India’s market and needs to raise capital to build its presence in India. As the costs will be incurred in Indian currency and suppose the company may not have a credit history in India, it may decide to issue a rupee-denominated bond in Europe.

The company benefits from lower borrowing costs while European investors benefit from investment diversification. These are the so-called Eurobonds. Eurobonds are named after the currency they are denominated in. For example, Euroyen and Eurodollar bonds are denominated in Japanese yen and American dollars respectively. Despite their name, Eurobonds aren’t necessarily denominated in euros and can take many different forms.

Advantages of investing in Eurobonds

  • Allow issuers to take advantage of favorable regulatory and lending conditions in other countries.
  • They are not usually subject to taxes or regulations of any one government, which can make it cheaper to borrow in the Eurobond market as compared to other debt markets.
  • Diversification of investments in other countries

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The risk involved in Eurobonds

  • Eurobonds are exposed to exchange risk in addition to credit risk and interest rate risk
  • Increase risk due to non-regulation
  • Investors are solely responsible to calculate withholding tax

 

Related:

Functioning of Credit Default Swaps

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