What is Eurobond?
308 reads · Last updated: December 5, 2024
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.Issuance of Eurobonds is usually handled by an international syndicate of financial institutions on behalf of the borrower, one of which may underwrite the bond, thus guaranteeing the purchase of the entire issue.
Definition
A Eurobond is a debt instrument denominated in a currency other than the home currency of the country or market in which it is issued. Eurobonds are typically grouped by the currency in which they are denominated, such as US dollars or Japanese yen. Because Eurobonds are issued in an external currency, they are often referred to as foreign currency bonds.
Origin
The concept of Eurobonds originated in the 1960s when the European market began issuing bonds denominated in US dollars. This issuance was aimed at circumventing US capital controls and providing international investors with more investment options. With globalization, the Eurobond market has expanded, becoming a significant part of the international capital market.
Categories and Features
Eurobonds can be classified based on the currency of denomination, place of issuance, and type of issuer. Common currencies include the US dollar, Japanese yen, and euro. Depending on the place of issuance, Eurobonds can be issued in Europe, Asia, or other regions. Issuers can be governments, financial institutions, or multinational corporations. Key features of Eurobonds include cross-border issuance, foreign currency denomination, and typically being underwritten by an international syndicate.
Case Studies
A typical case is the US dollar-denominated Eurobond issued by Coca-Cola in the 1980s. This allowed Coca-Cola to raise funds in the European market while avoiding domestic interest rate fluctuations in the US. Another example is the Japanese yen-denominated Eurobond issued by Toyota in 2010, which helped the company raise funds in the international market to support its global expansion.
Common Issues
Common issues investors might face when investing in Eurobonds include exchange rate risk and interest rate risk. Since Eurobonds are denominated in foreign currencies, exchange rate fluctuations can affect investment returns. Additionally, changes in interest rates can impact the market value of the bonds. Investors should carefully assess these risks and consider hedging strategies.
