INTERNATIONAL FINANCIAL MANAGEMENT

Assignment
On
THE INTERNATIONAL BOND MARKET

PREPARED FOR:
MR. RAJIB DATTA
ASSISTANT PROFESSOR,
FINANCE DISCIPLINE,
FACULTY OF BUSINESS ADMINISTRATION,
PREMIER UNIVERSITY, CHITTAGONG.

PREPARED BY:
“LUCKY CHARMS”
NAME STUDENT ID
MD. ARIFUR RAHMAN 1603410109055
IMRAN MAHMUD ROHEL 1603410109073
JUBAYDA KHANAM 1603410109132
SHAHRIAR ISLAM 1603410109145
SEMESTER: 8TH. BATCH: 34TH.
DEPARTMENT: FINANCE. SECTION: B.
DATE OF SUBMISSION: FEBRUARY, 2021.
 LETTER OF TRANSMITTAL

February, 2021.

Mr. Rajib Datta

Assistant Professor,
Finance Discipline,
Faculty of Business Administration,
Premier University, Chittagong.

Dear Sir,

As per your direction, in our ‘International Financial Management’

course we prepared an assignment on “The International Bond
Market(Eurobond).”

We tried our best to make this assignment as best as possible. In this

pandemic situation we altogether working from home connecting
through social media and we collected our all information through
internet from different sources and websites. Then we evaluate and
discussed about those information with each other. After that, finally we
were able to make this.

Thank you so much for giving us such an opportunity which we enjoyed

a lot.

Sincerely,
Team ‘Lucky Charms’
34th Batch, 8th Semester,
Finance(B),
Premier University, Chittagong.
 Abstract

A feature of the past decade has been the growing internationalisation

of bond markets. One aspect of this has been the rapid growth of the
predominantly London-based eurobond market. Another has been the
growth in the participation of foreign investors, issuers and
intermediaries in the major domestic markets. These developments
have been due in part to the processes of increased global economic
interdependence, financial liberalisation and technological innovation.
As a result, interactions between domestic bond markets and the
eurobond market have grown. This paper discuss the expansion of the
eurobond market, the increasing links between euro, domestic and
foreign bond markets, factors segmenting domestic and eurobond
markets, private placements, regulation and taxation, new issue
procedures, equity-linked eurobonds, asset-backed eurobonds and the
extent to which a truly global, homogeneous marketplace has begun
to emerge.
 Table of Contents
Chapter Topics Page
Introduction 2
Chapter 1: Background of the study 2
Introduction Purpose of the study 4
Significance of the study 5
Chapter 2: Review of Related Literature 7
Related
Literature
Design of the study 10
Chapter 3: Area of the study 10
Methodology Instrument for data collection 10
Method of data analysis 10
Chapter 4: Brief Introduction of the Chapter 13
Data
Findings 17
Presentation
and Analysis
Conclusion 20
Chapter 5: Recommendation 20
Conclusion Limitations of the study 21
References 22
 1

Chapter 1
Introduction
 2

Introduction

Eurobonds are traditionally defined as bonds which are issued, and

largely sold, outside the domestic market of the currency in which
they are denominated. They are typically underwritten by an
international syndicate of banks, are exempt from any withholding
taxes (i.e. taxes on coupon payments deducted at source), and are
bearer in nature (i.e. no register of ownership is maintained).
Originally, investors were attracted in particular by (and thus prepared
to pay a premium for) the bearer status of eurobonds and their
freedom from liability to withholding tax, although it is an over-
simplification to characterise all eurobonds as having such distinctive
features-practices vary between currency sectors and have altered
with time. Eurobonds are distinct from domestic and foreign bonds.
The Eurobond market has had a fantastic growth during the past 30
years. At its inception, in the early 1960s, the Eurobond market was
mainly a Eurodollar bond market, that is, a market for USD bonds
issued outside the U.S. Today, the Eurobond market comprises bonds
denominated in all the major currencies and several minor currencies.

Background of the Study

The growth of the Eurobond market was extraordinary. Shortly after

the introduction of the Interest Equalization Tax, in June 1963, the
first offshore bond issue denominated in U.S. dollars was launched. In
the same year a total of USD 145 million in new Eurobond issues was
raised, and by 1968 the volume had risen to USD 3 billion.
 3

On the strength of its early success, the Eurobond market quickly

established itself:

i. It had a marketplace in London.

ii. The U.K. authorities allowed the market to develop without

regulations or restrictions. London became, and remains today, the
principal center for new issues and the trading of USD denominated
Eurobonds.

iii. The speed and simplicity of issuing in the Eurobond market

compared favorably with the principal foreign bond market, the U.S.
Yankee market.

iv. The establishment in 1969 of the Association of International

Bond Dealers (AIBD) provided a forum for improving the design of
the market.

v. The early establishment of a clearing system, Euroclear and Cedel

in 1969 and 1970, respectively, resolved the problem of delivery and
custody.

The repeal of all the U.S. regulation did not slow the growth of the
U.S. dollar Eurobond market. When the IET was abolished in 1974,
the share of the U.S. foreign bond market increased but not
substantially. Later, in 1984, the U.S. government, to make its
domestic bond market more competitive, abolished the withholding
tax imposed on foreign lenders. Many people thought that this change
in the U.S. tax code would result in the absorption of the Eurodollar
 4

bond market into the U.S. foreign bond market. The Eurodollar bond
market continued to grow. International issuers were tired of the
delays and costs of registering new issues with the S.E.C. The
Eurobond market, because of its lack of government regulation,
continues to be the dominant international bond market.

The abolition of the U.S. withholding tax triggered, however, similar

fiscal liberalization in European countries and was followed by the
dismantling of exchange controls regulating access of domestic
investors to foreign securities markets. Eurobond issuing houses
quickly identified the potential and established new markets of
onshore investors to the benefit of international issuers. The definition
of the Eurobond market is thus no longer an issue. From having been
a market for anonymous offshore investors, the target audience is only
limited by the creative nature of the issuing houses.

Purpose of the Study

The purpose of this study is:

 To know about the international bond market

 To acquire knowledge about Domestic Bonds, Foreign Bonds
and Eurobonds
 To know about the Factors Segmenting Domestic and Eurobond
Markets

 To know about private placements, regulation and taxation

policy of those bonds
 5

 To know about the procedures of issuance of bonds

 Learn about the Equity-Linked Eurobonds and Asset-Backed

Eurobonds.

Significance of the Study

This study reviews the euro, domestic & foreign bond market in terms
of the structure of the market, the nature of the instruments, the
market players, the issuing process, and the technical aspects such as
taxation and swap arrangements. Through all of this key features one
can gather a lot knowledge about the international bond market as
well as this study will help the future researcher for further research,
new investors and borrowers to enter into the market.
 6

Chapter 2
Related
Literature
 7

Review of Related Literature

The bond market also known as debt market or credit 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 and this is usually in the form of bonds, but it may
include notes, bills and so on[CITATION EFB09 \l 2057 ]

On the other hand, [ CITATION DNe92 \l 2057 ] noted that the primary goal of
the bond market is to provide a mechanism for long term funding of
the public and private expenditures. Traditionally, the bond market
was largely dominated by the United States, but today the US is about
44 per cent of the global market. On the other side, according to
[ CITATION ASa12 \l 2057 ] bond markets are markets in which bonds are
issued and traded and they are used to assist in the transfer of funds
from individuals, corporation, and government units with excess
funds to corporations and government units in need of long term debt
funding.” But [ CITATION Mau85 \l 2057 ] noted and opted an important part
of the bond market is the government bond market, because of its size
and liquidity. Government bonds are often used to compare other
bonds to measures credit risk. Because of the inverse relationship
between bond valuation and interest rates, the bond market is often
used to indicate changes in interest rates or valuation and interest
rates, the bond markets is often used to indicate changes in interest
rates or the shape of the yield curve, the yield curve is the measure of
cost of funding.
 8

According to [ CITATION Ahu12 \l 2057 ] Globally speaking Mostly bond

market are dominated by individual investors are commonly found in
the corporate and municipal bond market where the incentives of low
denomination corporate bonds or tax free municipal bond have some
attraction. In recent individual investors have made their presence felt
in the bond market through the buying of mutual funds that
specialized in bond portfolios. investors must be prepared and
adhered to deal in a relatively strong primary market for new issue
market and a relatively weak secondary market that is resale market
and while the secondary market is active for many types of treasury
and agency issues, such is not the same for corporate issues and thus;
the investors must look well beyond the yield, maturity, and rating to
determine if a purchase is acceptable. The secondary market in bonds
tends to be dominated by the over the counter transactions [ CITATION

GBE12 \l 2057 ]. Therefore, the research is relevant to understanding the

international bond markets
 9

Chapter 3
Methodology
 10

Design of the Study

The research design of the study outlines the basic approach that
researchers use to answer their research question. To meet the aims
and objectives of the study it is important that researcher selects the
most appropriate design for achieving the aims of the study.

A quantitative approach was followed. Quantitative approach uses a

fixed design that organizes a detailed method of data collection and
analysis. A descriptive survey design was followed because it
provides an accurate portrayal or account of the characteristic.

Area of Study

As because of the pandemic situation of COVID19, whole study is

prepared from home through different secondary sources by the help
of internet and the information covered by this study are mostly
related to international arena specially European Continent.

Instrument for Data Collection

In order to get reliable and valid data we were used secondary data.
The secondary data will be gathered from published as well as
unpublished, documents, reports, journals, newspapers and other
electronic media (internet).

Method of Data Analysis

The analysis methods of this study fully based on the information

extracted from survey data collected using secondary source. It was
analyzed, summarized and presented via qualitative method of data
 11

analysis. Data which was collected by secondary sources qualitatively

and analyzed to complement the qualitative analysis.
 12

Chapter 4
Data
Presentation
and Analysis
 13

Brief Introduction of the Chapter

Literature Review

A literature review or narrative review is a type of review article. A

literature review is a scholarly paper that presents the current
knowledge including substantive findings as well as theoretical and
methodological contributions to a particular topic. Literature reviews
are secondary sources and do not report new or original experimental
work.

Research Methodology

Research methodology simply refers to the practical “how” of any

given piece of research. More specifically, it’s about how a
researcher systematically designs a study to ensure valid and reliable
results that address the research aims and objectives.

Data Analysis

Data analysis is defined as a process of cleaning, transforming, and

modeling data to discover useful information for business decision-
making. The purpose of Data Analysis is to extract useful information
from data and taking the decision based upon the data analysis.

BOND MARKET

The bond market is a financial market where participants buy and sell
debt securities, usually in the form of bonds.

The bond market primarily includes:-

 14

 Government-issued-securities.
 Corporate debt securities.

Domestic Bonds

Bonds issued in the country and currency in which they are traded.
Unlike international bonds, domestic bonds are not subject to
currency risk. They usually carry less risk, as the regulatory and
taxation requirements are usually known to investors in domestic
bonds, or at least to their brokers and accountants.

Foreign Bond

A foreign bond is a bond issued in a domestic market by a foreign

entity in the domestic market's currency as a means of raising capital.
For foreign firms doing a large amount of business in the domestic
market, issuing foreign bonds, such as bulldog bonds, Matilda bonds,
and samurai bonds, is a common practice.

Eurobond

A Eurobond is a debt instrument that's denominated in a currency

other than the home currency of the country or market in which it is
issued. Eurobonds are frequently grouped together by the currency in
which they are denominated, such as eurodollar or Euro-yen bonds.
Since Eurobonds are issued in an external currency, they're often
called external bonds. Eurobonds are important because they help
organizations raise capital while having the flexibility to issue them in
another currency.
 15

Private Placement of Eurobond

A private placement is a securities issue sold directly to a small group

of professional or institutional investors. Because a private placement
is sold to professional investors and not publicly advertised, market
regulators in many countries have been adopted more flexible
disclosure requirements and selling rules. Since Eurobonds are
offered for sale as private placements, they avoid much of the costly
regulatory requirements associated with public offering.

Regulation and Taxation of Eurobond

The European Community (EC) plan calls for a minimal amount of

regulation shared by all EC countries, complete freedom to offer
financial services throughout the EC, and home country control over
all activities supervised by firms headquartered in the home country.
These rules imply mutual recognition across EC countries and a
single passport to conduct business in financial services around the
EC. A sticking point in negotiations has been the differences in
national rules on withholding taxes, and disclosure of interest and
dividend payments to tax authorities. Luxembourg is the only EC
country with neither withholding
 16

Eurobond Issue Procedures

Eurobond issued typically, financial institutions, such as investment

banks, issue bonds on behalf of the borrower. If a bank will be
responsible for the underwriting process, it implies a guarantee to the
borrower that the whole bond issue will be sold in the primary market
during the initial debt offering process. Please note that the term
“Eurobond” refers only to the fact that the bond was issued in a
different country and currency. It does not need to be a country in
Europe. It can be whatever country in the world. For example,
Eurobonds can be issued in China and denominated in US dollars.
Eurobonds are issued by many institutions, such as:

 Corporations

 Governments

 Syndicates

The primary reason for issuing Eurobonds is a need for foreign

currency capital. Since the bonds are fixed-income securities; they
usually offer a fixed interest rate to investors. Imagine, as an example,
a US company aims to permeate into a new market and plans to erect
a large factory, say, in China. The company will need to invest large
sums of money in local currency – the Chinese yuan. As the company
is a new entrant to the Chinese market, it may lack access to credit in
China. The company decides to go with yuan-denominated Eurobonds
 17

in the United States. Investors who hold yuan in their accounts will
invest in the bonds, which will provide funds to a new facility in
China. If a new factory is profitable, the cash flow will go to settling
the interest to US-based bondholders.

Equity-Linked Eurobond

A bond denominated in a currency other than the one used in the

country where it is issued that offers a return based on the
performance of some stock or stock index. That is, the equity-linked
Eurobond generally offers a small, guaranteed return with the
possibility of a larger return dependent on the underlying stock or
index. Equity-linked Eurobonds combine some of the advantages of
both stocks and bonds, and also can help
an investor hedge against foreign exchange risk.

Findings

After studied and analysis all the data illustrated above, we found out
several advantages and disadvantages for companies to issue
Eurobonds. The advantages are-

a. Large amounts

b. Freedom and Flexibility

c. Lower cost of issue

d. Lower interest cost

 18

e. Longer maturities
Against these advantages, there are some disadvantages to consider
which is- there are issue costs to take into account if the debt is not
matched against a foreign currency asset, the Eurobond issuing firm
may be open to foreign exchange risk.

Besides this, there are also some advantages and disadvantages for
investors to issue Eurobonds. The advantages are like as-

 Tax free income

 Low Risk investment

 Convertible to Equity

 Liquid investment

As for disadvantages to the investor-

 Investing in a Eurobond is not a good idea for investors

who may need a repayment of the investment at short notice.

 There is always the risk of the issuing company going

under and the maturity value of the Eurobond not being paid
 19

Chapter 5
 20

Conclusions,
Recommendations
and References
 21

Conclusion

Eurobonds or External bonds are issued in international markets; they

are usually denominated by the currency of different countries. They
are mostly bearer bonds which are traded through the bonds issued
have the name Euro affixed to them, like Euro-dollar. Even if the
name of the bond has ‘Euro’ onto it, it does not equate to the fact that
it is only viable in the European markets, rather it can be in any
international market. Companies can venture and expand to new
regions, by building their presence in the new market. The condition
might be that they are not able to take credit in the new region, so
they will issue bond which is dominated by the country’s currency (let
us say Rupee-dominated because they are expanding in India).
Eurobonds allows companies to be benefited from lower borrowing
costs, thanks to globalization Eurobonds have seen raise in popularity.

Recommendations

As we said earlier that in cause of pandemic of COVID19, we can’t

collect any primary data by doing fieldwork. So we have to prepare
the whole paper on the basis of secondary data which we collected
from different sources. That’s why we recommend future researcher
or whoever read or use this paper for their further work, do analyse
the data once again and we specially suggest and encourage for the
fieldwork if the situation is in hand.
 22

Limitations of the Study

While preparing this paper, we have faced some obstructions such as:

1.Lack of detailed and proper information from the websites of

the International Bond Markets.

2.Inexperience and time constraints are the limitations

restricting this paper from being more detailed and accurate.

3.Secondary data has been collected from some sources, which

might not be reliable or accurate.

4. Recent data and information on different activities was

unavailable. Finding data and information on most recent times are
not easy to find.

5.Last but not the least; a good study requires the analysis of as
much data as possible, which is not possible due to time constraints.

6. Covering various aspects of the study might lead to

inaccuracies and might not be up to the expectations, we wished to be
excused for it and learn from our mistakes.
 23

References
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Brigham, E., & Houston, J. (2009). Fundamentals of financial management (concise 6th ed.).

Eggertsson, G., & Krugman, P. (2012). Debt, deleveraging, and the liquidity trap: A Fisher-Minsky-Koo
approach.

Needham, D., & Dransfield, R. (1992). ”Business and Finance for working in organizations, bath press
LTD, Bath, Heinemann Education. Rank.

Obstfeld, M., & Krugman, P. R. (1985). Floating Exchange Rates: Experience and Prospects.

Saunders, A., & Cornet, M. (2012). Financial markets and institutions.

https://www.tutorialspoint.com/international_finance/international_bond_markets.htm

https://www.investopedia.com/terms/e/eurobond.asp

https://www.bis.org/publ/econ32.pdf

https://en.wikipedia.org/wiki/Bond_market