The World’s Bond Markets:

A Statistical Perspective:
 The total market value of the world’s bond
markets are about 50% larger than the world’s
equity markets.
 Most issues are denominated in U.S. dollars, euro
and Japanese yen.

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 International Bond & money market

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 A Statistical Perspective:

Currency (U.S. $ billions) Percent

U.S. Dollar 22,423.2 43.6
Euro 13,270.9 25.8
Yen 8,633.6 16.8
Other 7,068.1 13.8
Total 51,395.8 100
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 Amounts of Domestic and International
Bonds Outstanding
Currency Domestic International Total
U.S. dollar $17,930.7 $ 4,492.5 $ 22,423.2
Euro $ 8,436.4 $ 4,834.5 $ 13,270.9
Pound $ 1,274.6 $ 778.7 $ 2,053.3
Yen $ 8,145.0 $ 488.6 $ 8,633.6
Other $ 4,506.6 $ 508.2 $ 5,014.8
Total $40,293.3 $ 11,102.5 $ 51,395.8

(As of Year-End 2004 in U.S. $Billions)

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 Three Categories of International Bonds

 Domestic bonds: Issued, underwritten and then traded with the currency and regulations of the
borrower’s country.
 Eurobonds: A Eurobond issue is one denominated in a particular currency, but sold to investors in
national capital markets other than the country which issues the denominating currency.
 Foreign bonds 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.

 For example:
 Domestic bonds: A British company issues debt in the United Kingdom with the principal and
interest payments based or denominated in British pounds.
 Eurobonds: A British company issues debt in the United States with the principal and interest
payments denominated in pounds.
 Foreign bonds: A British company issues debt in the United States with the principal and interest
payments denominated in dollars.

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 Foreign Bonds and Eurobonds
 Bearer Bonds and Registered Bonds
 National Security Registrations
 Withholding Taxes
 Recent Regulatory Changes
 Global Bonds

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 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.

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 National Security Registrations
 Yankee bonds must meet the requirements of the
SEC, just like U.S. domestic bonds.
 Many borrowers find this level of regulation
burdensome and prefer to raise U.S. dollars in the
Eurobond market.
 Eurobonds sold in the primary market in the
United States may not be sold to U.S. citizens.
 Of course, a U.S. citizen could buy a Eurobond on
the secondary market.
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 Withholding Taxes
 Prior to 1984, the United States required a 30
percent withholding tax on interest paid to
nonresidents who held U.S. government or U.S.
corporate bonds.
 The repeal of this tax led to a substantial shift in
the relative yields on U.S. government and
Eurodollar bonds.
 This lends credence to the notion that market
participants react to tax code changes.
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 Global Bonds
 A global bond is a very large international bond
offering by a single borrower that is
simultaneously sold in North America, Europe
and Asia.
 Global bonds denominated in U.S. dollars and
issued by U.S. corporations trade as Eurobonds
overseas and domestic bonds in the U.S.

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 Types of Instruments
 Straight Fixed Rate Debt
 Floating-Rate Notes
 Equity-Related Bonds
 Zero Coupon Bonds
 Dual-Currency Bonds
 Composite Currency Bonds

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 Straight Fixed Rate Debt
 These are “plain vanilla” bonds with a specified
coupon rate and maturity and no options attached.
 Since most Eurobonds are bearer bonds, coupon
dates tend to be annual rather than semi-annual.
 The vast majority of new international bond
offerings are straight fixed-rate issues.

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 Floating-Rate Notes
 Just like an adjustable rate mortgage.
 Common reference rates are 3-month and 6-month
U.S. dollar LIBOR
 Since FRN reset every 6 or 12 months, the
premium or discount is usually quite small

…as long as there is no change in the default risk.

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 Equity-Related Bonds
 Convertibles
 Convertible bonds allow the holder to surrender his
bond in exchange for a specified number of shares in
the firm of the issuer.
 Bonds with equity warrants
 These bonds allow the holder to keep his bond but still
buy a specified number of shares in the firm of the
issuer at a specified price.

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 Zero Coupon Bonds
 Zeros are sold at a large discount from face value
because there is no cash flow until maturity.
 In the U.S., investors in zeros owe taxes on the
“imputed income” represented by the increase in
present value each year, while in Japan, the gain is
a tax-free capital gain.

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 Dual-Currency Bonds
 A straight fixed-rate bond, with interest paid in
one currency, and principal in another currency.
 Japanese firms have been big issuers with coupons
in yen and principal in dollars.
 Good option for a MNC financing a foreign
subsidiary.

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 Composite Currency Bonds
 Denominated in a currency basket, like the SDRs
or ECUs instead of a single currency.
 Often called currency cocktail bonds.
 Typically straight fixed rate debt.

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 International Bond Market
Credit Ratings
 Fitch IBCA, Moody’s and Standard & Poor’s
sell credit rating analysis.
 Focus on default risk, not exchange rate risk.
 Assessing sovereign debt focuses on political
risk and economic risk.

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 International Bond Market Indices
 There are several international bond market
indices.
 J.P. Morgan and Company
 Domestic Bond Indices
 International Government bond index for 18 countries.
 Widely referenced and often used as a benchmark.
 Appears daily in The Wall Street Journal

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 International Money Market
 Eurocurrency is a time deposit in an international
bank located in a country different than the
country that issued the currency.
 For example, Eurodollars are U.S. dollar-denominated
time deposits in banks located abroad.
 Euroyen are yen-denominated time deposits in banks
located outside of Japan.
 The foreign bank doesn’t have to be located in Europe.

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 Eurocurrency Market
 Most Eurocurrency transactions are interbank
transactions in the amount of $1,000,000 and up.
 Common reference rates include
 LIBOR the London Interbank Offered Rate
 PIBOR the Paris Interbank Offered Rate
 SIBOR the Singapore Interbank Offered Rate
 A new reference rate for the new euro currency
 EURIBOR the rate at which interbank time deposits of
€ are offered by one prime bank to another.
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 Eurocredits
 Eurocredits are short- to medium-term loans of
Eurocurrency.
 The loans are denominated in currencies other
than the home currency of the Eurobank.
 Often the loans are too large for one bank to
underwrite; a number of banks form a syndicate to
share the risk of the loan.
 Eurocredits feature an adjustable rate. On
Eurocredits originating in London the base rate is
LIBOR.
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