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Presentation On
International Bond
Market
Presented By..........
(26FIN A2)
 Md. Ariful Islam Chowdhury
 Md. Hasibur Rahman
 Md. Nuhas Hossain
 Md. Sajedur Rahman
 Abdullahil Kafi
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Introduction
The 1980s were a period of very rapid expansion for the international bond market. It
now constitutes a major avenue for cross-border capital flows, and accounts for some
11% of the total nominal outstandings in the global bond markets.
This paper is intended to provide an overview of the international bond market. The main
theme running through the account is the relationship between the international and
domestic bond markets, which has both a competitive and a complementary aspect. In the
first section the market is examined in its historical context, with particular emphasis on
the Euro-bond market, which now accounts for three-quarters of all international bonds.
The differences between Euro-bonds, foreign bonds and domestic bonds are described
and the reasons for the use of international bonds are reviewed.
The second section of the paper deals with the way in which the Euro-bond market is
organised, and looks at the trading conventions employed, the importance of bearer status
and the absence of withholding tax, and the functioning of the primary and secondary
markets. In the third section borrower and investor behaviour in the market are described,
together with some important technical innovations which have influenced the market's
development. The prospects for the international bond market in the 1990s are discussed
in the concluding part of the paper. It is suggested that the potential for a further
diversion of business from the domestic to the international market exists mainly in
Europe and in particular in the growth of a large ecu bond market.
Changing Nature of the Global Bond
Market


Historically, the U.S. bond market dominated the global bond
market, with the U.S. market representing a key source of
financing for U.S. and foreign corporations.
However, since the expansion of the European Union and the
advent of the Euro-Zone, Europe’s importance in the global
bond market as grown.
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–

In 2001, the U.S represented 44% of the world’s bond market; the
European Union represented 28% (the Euro-zone countries: 23%).
By 2009, the U.S. share of the global bond market had fallen to 34% and
the European Union’s share had grown to 36% (the Euro-zone countries:
30%).
While today the U.S. market is dominated by U.S. firms, an
increasing of U.S. company bond financing is taking place in
the European bond markets.
Nature of Bond

A written and signed promise to pay a certain
sum of money on a certain date, or on
fulfillment of a specified condition. All
documented contracts and loan agreements
are bonds.
Bond market

The bond market (also known as the credit, or fixed income
market) is a financial market where participants can issue new
debt, known as the Primary market, or buy and sell debt
securities, known as the Secondary market, usually in the form
of bonds. The primary goal of the bond market is to provide a
mechanism for long term funding of public and private
expenditures. As of 2009, the size of the worldwide bond
market (total debt outstanding) is an estimated $82.2 trillion, of
which the size of the outstanding U.S. bond market debt was
$31.2 trillion according to BIS (or alternatively $35.2 trillion as of
Q2 2011 according to SIFMA)
Worlds Bond Market

The world’s bond market can be divided into
two broad groups:
 Domestic bond market
 International bond market.
Domestic Bond Market

The domestic bond market is comprised of
all securities issued in each country by
“domestic” government entities and
corporate.
–
In this case, issuers are domiciled (i.e.,
headquartered) in the country where those bonds
are traded.
International bond market

The international bond market is comprised
of non-residents borrowing in another
country’s bond markets
The international bond market consists of two
groups:
 Foreign Bonds and
 Eurobonds
U. S. bond market size
According to the Securities Industry and Financial Markets Association (SIFMA)
as of Q2 2011, the U. S. bond market size is (in trillions of dollars)
Government
Municipal
Agency
Corporate
Mortgage
related
Asset Backed
Total
9.2
2.9
2.4
7.7
8.3
1.9
32.
3
International Bond Market Instruments
Instrument
Frequency of
Payment
Size of Coupon
Payoff at Maturity
Straight Fixed-Rate
Annual
Fixed
Currency of issue
Floating Rate Note
Every 3 or 6 months
Variable
Currency of issue
Convertible Bond
Annual
Fixed
Straight fixed rate
with equity warrants
Annual
Fixed
Zero
none
zero
Currency of issue
or conversion to
equity shares.
Currency of issue
plus conversion to
equity shares.
Currency of issue
Dual Currency
Bond
Annual
Fixed
Dual currency
Bearer Bonds and Registered Bonds



Bearer Bonds are bonds with no registered
owner. As such they offer anonymity but they
also offer the same risk of loss as currency.
Registered Bonds: the owners name is
registered with the issuer.
U.S. security laws require Yankee bonds sold
to U.S. citizens to be registered.
Foreign Bond




Foreign Bond:
- Issued by a foreign borrower to investors in another
country and denominated in the currency of that
country. Yankee, Samurai, Bulldog bonds.
Investors view it as a debt instrument issued by a
foreign instead of a domestic borrower.
Ford issues offers a bond denominated in SFs to
Swiss investors.
Foreign Bonds: Characteristics

Foreign Bonds are bonds issued by a non-resident and
denominated in the currency of the country in which it is being
placed (i.e., issued).
–

Foreign bonds are subject to the regulations of the country in
which the bond is being offered.
–

The SEC regulates foreign bond offerings in the U.S.
Historically, the most important foreign bond markets have been in
Zurich, New York, and Tokyo.
–

Example: Ford Motor Corporation issuing a yen denominated bond in
Japan
Zurich and Tokyo because of low market interest rates; the U.S.
because of its large market.
Foreign bonds are often swapped out for another currency
History of the Foreign Bond Market







100 years ago, the international bond markets consisted solely of foreign
bonds, that is, bonds issued, placed, and traded in a bond market which was
foreign to the issuer's country of incorporation.
Issuers were typically foreign governments or private sector utilities such as
railway companies.
After WW I, the world saw a strong U.S. economy and a strong U.S. dollar.
During this period, world capital markets served primarily to channel European
savings into the U.S. economy.
Issuance activity elsewhere in the international markets remained small.
This dominance of the U.S. foreign bond market became even stronger after
WW II. For years the U.S. foreign bond market was the largest and most
important foreign bond market.
In recent years, however, it has been surpassed by the Swiss franc (CHF)
foreign bond market.
m
Impact of Exchange Rate Changes on
Foreign Bond Returns (For U.S. Investors)
Eurobonds


- Denominated in a specific currency, but
sold to investors in a national capital market
other than the country of the denominated
currency.
Swiss borrower issues $-denominated bonds
to investors in UK, India,and Japan

Eurobonds are bonds issued by a non-resident and denominated in
other than the currency of the country in which it is being placed.
–
–



The bond’s currency of denomination is referred to as an offshore
currency.
Example: Coca Cola issuing a U.S. dollar denominated bond in Europe.
They are generally issued and sold simultaneously in more than one
market and thus the advantage of the Eurobond market is that issuers
can raise large sums of capital from investors all around the world.
Issuers include national governments, supranational organizations
(such as the World Bank),“AAA” corporations and global banks.
The U.S. dollar is the dominant currency of denomination for
Eurobonds.
History of the EuroBond Market

The first Eurobond (which was also a U.S. dollar denominated
bond) was the July 1963 issue by the Italian Autostrade (Italian
National Highway Authority), led by SG Warburg & Co and issued
in London.
–



$15 million; 5.5% coupon; 15 year bonds; listed on the London and
Luxembourg stock exchanges.
By 1972, the market had grown to $5 billion; $42 billion by 1982
and $371 billion by 1995.
In the early 1960s, the Eurobond market was mainly a Eurodollar
bond market.
Today, the Eurobond market comprises bonds denominated in all
the major currencies and several minor currencies.
–
For example, in 1996, the Eurobond market included issues
denominated in the Egyptian pound, Polish zloty and Croatian kuna.
EuroBond Market by Currency, Early
Years (% of Total Volume)
The Main Features of a Eurobond



Eurobonds are not regulated by the country of the currency in which they
are denominated.
Eurobonds are “bearer bonds”, i.e., they are not registered anywhere
centrally, so whomever holds (or bears) the bond is considered the owner.
Bearer status also enables Eurobonds to be held anonymously.
The Eurobond market is largely a wholesale (i.e., institutional market) with
bonds held by large institutions.
–


Pension funds, insurance companies, mutual funds
Since they are denominated in an offshore currency, investors in eurobonds assume both credit and foreign exchange risks (if the currency if
denomination is other than their home currency).
Some publically offered eurobonds trade on stock exchanges, normally in
London or Luxembourg. Others are placed directly with institutional
investors without a listing (private placement).
Types of Eurobonds

Conventional or Straight Eurobonds have a fixed coupon (usually paid on an annual basis) and
maturity date when all the principal is repaid.

Floating rate bond notes (FRN) are usually short to medium term bond issues, with a coupon interest
rate that “floats,” i.e. goes up or down in relation to a benchmark rate plus some additional “spread” of
basis points (each basis point being one hundredth of one percent). The reference benchmark rate is
usually LIBOR (London interbank offered rate) or EURIBOR (Euro interbank offered rate). The “spread”
added to that reference rate is a function of the credit quality of the issuer.

Zero-coupon bonds do not have interest payments.

Convertible bonds can be exchanged for another instrument, usually an ordinary share or shares (fixed
ahead of time with a predetermined price) of the issuing organization. The coupon payable is usually lower
than it otherwise would be. Because convertible bonds can be viewed more as equity shares than bonds,
the credit and interest rate risks for investors are higher than with conventional bonds.

High-yield bonds are also part of the Eurobond markets, a class of bonds (rather than a type of bond)
which individual investors may encounter. High-yield bonds are those that are rated to be “below
investment grade” by credit rating agencies (i.e. issuer has a credit rating below BBB).
Relative Growth of Foreign Bonds and
Euro Bonds, Early Years
Relative Growth of Foreign Bonds and
Euro Bonds, Later Years
Domestic Versus International Bond Market
by Country; % of GDP, 2011
International Bond Market
Credit Ratings

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Fitch IBCA, Moody’s , Standard & Poor’s
and DBRS sell credit rating analysis.
Focus on default risk, not exchange rate risk.
Assessing sovereign government debt
focuses on political risk and economic risk.
Economic risk: external debt, BOP flexibility,
economic structure & growth, management
of the economy, and economic prospects
Euro-Bond Market Versus U.S. Bond
Markets
Eurobonds: 1964 - 1969 Eurobonds; 1995 - 2006