International Bond Markets

Any bond sold outside the country of the borrower is called an international bond. However there are two important types of international bonds foreign bonds and Eurobonds. Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold. For instance, Northern Telcom (a Canadian company) may need U.S. dollars to finance the operations of its subsidiaries in the United States. If it decides to raise the needed capital in the U.S. bond market, the bond will be underwritten by a syndicate of U.S. investment bankers, denominated in U.S. dollars, and sold to U.S. investors in accordance with SEC and applicable state regulations. Except for the foreign origin of the borrower, this bond will be indistinguishable from those issued by equivalent U.S. corporations. Since Northern Telcom is a foreign corporation, however, the bond will be called a foreign bond.

The term Eurobond is used to designate any bond issued in one country but denominated in the currency of some other country. Examples include a Ford Motor Company issue denominated in dollars and sold in Germany, or a British firm’s sale of mark denominated bonds in Switzerland. The institutional arrangements by which Eurobonds are marketed are different than those for most other bond issues, with the most important distinction being a far lower level of required disclosure than is usually found for bonds issued in domestic markets, particularly in the United States. Governments tend to be less strict when regulating securities denominated in foreign currencies. Because the bonds purchasers are generally more “sophisticated”. The lower disclosure requirements result in lower total transaction costs for Eurobonds.

Eurobonds appeal to investors for several reasons. Generally, they are issued in bearer form rather than as registered bonds, so the names and nationalities of investors are not recorded. Individuals who desire anonymity, whether for privacy reasons or for tax avoidance, like Eurobonds. Similarly, most governments do not withhold taxes on interest payments associated with Eurobonds. If the investor requires an effective yield of 10 percent. A Eurobond that is exempt from tax withholding would need a coupon rate of 10 percent. Another type of bond for instance, a domestic issue subject to a 30 percent withholding tax on interest paid to foreigners would need a coupon rate of 14.3 percent to yield an after withholding rate of 10 percent. Investors who desire secrecy would not want to file for a refund of the tax. So they would prefer to hold the Eurobond.

More than half of all Eurobonds are denominated in dollars. Bonds in Japanese yen. German marks and Dutch guilders account for most of the rest. Al-though centered in Europe, Eurobonds are truly international. Their underwriting syndicates include investment bankers from all parts of the world and the bonds are sold to investors not only in Europe but also in such faraway places as Bahrain and Singapore. Up to a few years ago. Eurobonds were issued solely by multinational firms by international financial institutions or by national governments. Today however the Eurobond market is also being tapped by purely domestic U.S. firms because they often find that by borrowing overseas they can lower their debt costs.