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Eurobond

Eurobond.webp

Key Highlights

  • A Eurobond is a type of bond that is issued in a currency different from the home currency of the country or market where it is issued.

  • Key characteristics includes currency, issuance location, issuer, investor base, format and liquidity.

What is Eurobond?

A Eurobond is a type of bond that is issued in a currency different from the home currency of the country or market where it is issued. Despite the name, Eurobonds have nothing to do with the euro or Europe specifically- they can be issued in any currency and in any country.

For example, a bond issued in Japan and denominated in U.S. dollars is a Eurobond.

Key Characteristics

  • Currency: Denominated in a foreign currency (e.g., a dollar-denominated bond issued outside the U.S.).

  • Issuance Location: Issued in countries outside the jurisdiction of the currency in which it’s denominated.

  • Issuer: Can be governments, corporations, or international organizations.

  • Investor Base: Targeted at international investors.

  • Format: Typically issued in bearer form, meaning ownership is determined by physical possession of the bond.

  • Liquidity: Generally highly liquid and traded in over-the-counter (OTC) markets.

Why Issue a Eurobond?

1. Access to international capital: Issuers can reach a broader base of investors.

2. Favorable interest rates: Some markets may offer lower borrowing costs.

3. Currency matching: Useful for multinational companies that earn revenues in a foreign currency.

4. Less regulation: Often issued in markets with lighter regulatory requirements than domestic markets.

Types of Eurobonds

1. Eurodollar Bonds: Denominated in U.S. dollars but issued outside the U.S.

2. Euroyen Bonds: Denominated in Japanese yen but issued outside Japan.

3. Euro-euro Bonds: Denominated in euros but issued outside the Eurozone.

Example

If an Indian company issues a bond in London that is denominated in U.S. dollars, that bond is considered a Eurobond. The name reflects the cross-border and foreign-currency nature of the bond, not the continent.

Risks Involved

  • Currency Risk: If investors or issuers deal in different currencies, exchange rate fluctuations can affect returns or liabilities.

  • Political and Regulatory Risk: Varies by the jurisdiction of issuance.

  • Interest Rate Risk: Changes in global interest rates can impact bond prices and yields.