1. Definition of 'Bond Market'
The environment in which the issuance and trading of debt
securities occurs. The bond market primarily includes
government-issued securities and corporate debt securities, and
facilitates the transfer of capital from savers to the issuers or
organizations requiring capital for government projects, business
expansions and ongoing operations.
What is bond?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. Traditionally, the bond market was largely
dominated by the United States, but today the US is about 44% of
the market. 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 Bank for International Settlements (BIS), or
alternatively $35.2 trillion as of Q2 2011 according to Securities
Industry and Financial Markets Association (SIFMA).Nearly all
of the $822 billion average daily trading volume in the U.S. bond
market takes place between broker-dealers and large
institutions in a decentralized, over-the-counter (OTC) market.
However, a small number of bonds, primarily corporate, are listed
on exchanges.References to the "bond market" usually refer to
the government bond market, because of its size, liquidity, relative
lack of credit risk and, therefore, sensitivity to interest rates.
2. Because of the inverse relationship between bond valuation and
interest rates, the bond market 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".
Definition of 'International Bond'
Debt investments that are issued in a country by a non-domestic
entity. International bonds are issued in countries outside of the
United States, in their native country's currency. They pay interest
at specific intervals, and pay the principal amount back to the
bond's buyer at maturity.
International Bond:-A bond issued in a country or currency other
than that of the investor or broker. They include Eurobonds, which
are issued in a foreign currency, foreign bonds, which are issued
by a foreign government or corporation in the domestic market,
and global bonds, which are issued in both domestic and
international markets. Unlike domestic bonds, international bonds
are usually subject to currency risk. Caution is required when
investing international bonds because they may be subject to
different regulatory and taxation requirements than the ones with
which the investor or broker is familiar.
Investopedia explains 'International Bond':=International bonds
include eurobonds, foreign bonds and global bonds. A different
type of international bond is the Brady bond, which is issued in
U.S. currency. Brady bonds are issued in order to help developing
countries better manage their international debt. International
bonds are also private corporate bonds issued by companies in
foreign countries, and many mutual funds in the United States
hold these bonds.
3. INTERNATIONAL BOND IS FURTHER CLASSIFIED IN TWO TYPES
B. Foreign bond
Definition of 'Eurobond'”-A bond issued in a currency other
than the currency of the country or market in which it is
Usually, a eurobond is issued by an international syndicate
and categorized according to the currency in which it is
denominated. A eurodollar bond that is denominated in U.S.
dollars and issued in Japan by an Australian company would
be an example of a eurobond. The Australian company in
this example could issue the eurodollar bond in any country
other than the U.S.Eurobonds are attractive financing tools
as they give issuers the flexibility to choose the country in
which to offer their bond according to the country's
regulatory constraints. They may also denominate their
eurobond in their preferred currency. Eurobonds are
attractive to investors as they have small par values and
'Foreign Bond':-A bond that is issued in a domestic market
by a foreign entity, in the domestic market's currency. A
foreign bond is most often issued by a foreign firm to raise
capital in a domestic market that would be most interested in
purchasing the firm's debt. For foreign firms doing a
large amount of business in the domestic market, issuing
foreign bonds is a common practice. Types of foreign bonds
include bulldog bonds, matilda bonds and samurai bonds.
4. FEATURES OF INTERNATIONAL BOND
It is a fund raising market
It is debt market
Fixed income instrument
Issued in foreign currency
THE PROCESS OF BRIGING A NEW INTERNATIONAL BOND TO THE
Step 1:-A borrower will contact an investment banker ask it to serve as
lead manager of an underwriting syndicate that will bring the
bonds to market.
Step 2:- The lead manager will usually invite other banks to form a
managing group to help negotiate terms with the borrower,
ascertain market conditions, and manage the issuance.
Step 3:-The managing group, along with other banks, will serve as
underwriters for the issue, i.e., they will commit their own capital
to buy the issue from the borrower at a discount from the issue
Step 4:-The various members of the underwriting syndicate receive a
portion of the spread (usually in the range of 2 to2.5 percent of
the issue size), depending upon the number and type of functions
Step 5:-The lead manager receives the full spread, and a bank serving
a member of the selling group receives a smaller portion.
5. RISK OF INVESTING IN BOND
1. Inflation Risk
2. Interest rate Risk
3. Default Risk
4. Downgrade Risk
5. Liquidity Risk
6. Reinvestment Risk
7. Rip-off Risk
ADVANTAGES & DISADVANTAGES OF INTERNATIONAL
Diversify your portfolio
International fund raising instrument
Fixed income market
Investment avenue(short term as well as long term
Disadvantages:- Investing in international bond funds can help
you diversify your portfolio. However, there are some potential
drawbacks that you need to know about. Here are four
disadvantages of investing in international bond funds.
6. 1. Outperformed by Mutual Funds:-When you invest money
into an indexed bond ETF, you are going to run the risk of
being outperformed. Many actively managed mutual funds
can outperform these types of funds. Therefore, you may not
be choosing the best place to put your money.
2. Fees:-Many people that invest in these types of funds like to
buy and sell shares frequently. When you do this, you are
going to incur fees. These fees can significantly cut into the
amount of return that is made from the international bond
3. Risk:-By investing in this type of fund, you are taking on
extra risk. You have to be aware of international market
concerns as well as geopolitical and economic risks.
4. Limited SelectioN:-If you want to invest in international
bond funds, you are going to find that you have a very
limited selection to choose from. While there are hundreds of
ETFs to choose from, those that specialize in international
bond funds are a little more difficult to come by.
INSTRUMENTS OF INTERNATIONAL BOND MARKET
FIXED RATE BONDS (71% of market in 2003) - Fixed maturity
date (long term), fixed coupon rate (% of face value), issued in £,
€, ¥, or $. Interest only bonds (non-amortizing). Coupon pmts
are usually made annually, not semi-annually as for most
domestic bonds, more convenient for bondholder, less costly for
issuer (bondholders are scattered). Eurobonds are bearer bonds
and owners hold a physical bond certificate. How does bearer
receive interest pmts? Owner clips bond coupons and presents
to bank for annual payment.
7. FLOATING-RATE NOTES (FRN), 26% of Market- Started in
1970. Usually medium term (1-10 year) bonds with a quarterly or
semi-annual floating/variable coupon rate, like an ARM, issued
mostly in $ and €. Indexed to some reference interest rate like 6
month LIBOR (CH 11). Semi-annual pmt (reset at the beginning
of each 6 month period) would be .50 ( LIBOR + Risk Premium) of
face value, risk premium usually 1/8 percent (.125%) for firm's
with very good credit rating. Example: Rate is: LIBOR + .125%,
and LIBOR = 6.6%. Semi-annual coupon pmts for every $1000
face value would be: .50 (6.6% + .125%) ($1000) = $33.625. In
six months if LIBOR is 5.7%, the payment would be: .50 (5.7% +
.125%) ($1000) = $29.125. Advantage of FRNs - compared to
fixed rate bonds, very little interest rate risk (capital or price risk),
i.e., the price of the bond will fluctuate between reset dates, but
will adjust back to par ($1000) after the quarterly or semi-annual
reset date. Why might the FRN not sell at par, even at the reset
date?? Example: National Bank of Kuwait issued $450m of 3-year
FRNs in 2002, indexed to LIBOR + 25 bp (1/4%).
EQUITY-RELATED BONDS (3% Market)
Bonds with Warrants - Fixed rate bond with call options
(warrants) on the company's stock. The warrant allows the
bondholder to buy a certain number of equity shares at a
predetermined price on or before a fixed date. Why issue? When
would you exercise?
8. ZERO COUPON BONDS - Bonds that do not pay interest over
their life. Sold at a deep discount off face value ($1000), with one
payment only, at maturity. Advantages? Company can borrow
money, have no debt payments. It can actually deduct interest as
a taxable expense. Investors avoid reinvestment rate risk (fixed
duration). In countries like Japan (and Europe) with no long term
capital gains tax, zero coupons have a tax advantage over
coupon bonds. Coupon payments are taxable as interest income,
but the long-term capital gain (Face Value - Price) is non-taxable.
Example: 10-year zero coupon DM bonds, sold at 50% of face
value, 15-year zero coupon DM bonds sold at 33 1/3% of face
value. YTM: _______ for 10 year, _________ for 15 year.
DUAL-CURRENCY BONDS :-Started in mid-80s. Fixed rate
coupon pmts are made in one currency (SF or ¥), maturity value
(principal) is paid in another currency ($). The $ maturity value is
fixed, so a dual-currency bond includes a long term forward
contract. If dollar appreciates (depreciates), the value of the bond
rises (falls). Dual-currency bonds are riskier for investors, so the
yield (coupon rate) is higher. Japanese MNCs have issued Yen/$
dual currency bonds, coupons paid in Yen, principal paid in $, to
finance FDI in U.S. Example: Honda might issue dual currency
Yen/Dollar bonds to expand or establish factory in U.S. Longterm investment, may not be profitable for 10 years. The loan can
be serviced in Yen from Japan, and the principal can be paid with
long-term dollar profits earned in the U.S. bond instruments and
currency distribution: $ and € bonds account for 84% of the
market. € has grown in importance, SF and C$ have declined.
9. WHAT IS EUROBOND ?
(1) Underwritten by an international syndicate,
(2) Offered at issuance simultaneously to investors in a number
(3) Issued outside the jurisdiction of any single country.
Definition of 'Eurobond'”-A bond issued in a currency other
than the currency of the country or market in which it is issued.
Investopedia explains 'Eurobond':-Usually, a eurobond is issued
by an international syndicate and categorized according to the
currency in which it is denominated. A eurodollar bond
that is denominated in U.S. dollars and issued in Japan by an
Australian company would be an example of a eurobond. The
Australian company in this example could issue the eurodollar
bond in any country other than the U.S.Eurobonds are attractive
financing tools as they give issuers the flexibility to choose the
country in which to offer their bond according to the country's
regulatory constraints. They may also denominate their eurobond
in their preferred currency. Eurobonds are attractive to investors
as they have small par values and high liquidity. Examples of
eurobonds.1) Wal-Mart issues bonds denominated in U.S. dollars
on the German financial markets.2. The French government
issues euro-denominated bonds on the Japanese financial
The Procedures for the Eurobond Issuance Process:Select a Lead Manager:-Eurobonds are issued by underwriting
syndicates. These syndicates are made up of investment and
merchant banks and may be formed in different ways.
Generally, the borrower chooses one investment bank to be the
lead manager of the bond issue. The lead manager then
10. negotiates with other banks to form the syndicate. Borrowers may
also use existing syndicates or ask a particular investment banker
to act as lead manager.
Organize a Syndicate:-The lead manager negotiates with other
banks to form a managing group. This group then negotiates the
terms of the bond issue with the borrower. Members of the
managing group will also form another group to act as
underwriters in the bond issue. The underwriters will commit their
own money to buy the bond issue from the borrower -- at a set
minimum price. They then sell the bonds on to secondary markets
at an agreed profit. The managing group will also negotiate with
other banks to form a selling group -- this is the group of banks
that will actually sell the bonds to investors.
Selling the Bonds:-Once the syndicate is formed and the terms
of the issue are agreed upon, the managing group buys the bonds
from the borrower. The managing group then sells the eurobonds
to the underwriters, and the underwriters sell the bonds to the
selling group. The banks that make up the selling group then sell
the bonds on to investors. One thing to keep in mind is that
although there are several roles -- managers, underwriters and
sellers -- these roles usually overlap, so that managers may also
be underwriters and sellers.
Principal Paying Agent:-A principal agent is chosen. This is the
bank that is responsible for receiving interest payments from the
borrower and passing them on to the investors who buy the
bonds. A fiscal agent or trustee may also be appointed by the
borrower to handle the paperwork and legal aspects of the
eurobond issue and act as principal agent.
The trustee will also represent the purchasers of the bond if the
borrower defaults. Trustees and fiscal agents are generally banks,
and not individuals.
11. UNIQUE CHARACTERISTICS OF EUROBOND
1 FACE VALUE/ PAR VALUE: The face value isthe amount of money a
holder will get back,once a bond matures.
2) COUPON (THE INTEREST RATE):The couponis the amount
the bondholder will receive asinterest payments. It s called coupon
becausein early days there were physical couponsattached to the bond
3) MATURITY: It is the date in the future onwhich the investor s
principal will be repaid.
4) ISSUER: Eurobonds are mostly issued bycorporate
5) DENOMINATIONS: various currencies arecommonly used the US
$ is used the most,denominating 70-75 % of Eurobonds.
6 SECONDARY MARKET: Eurobonds have asecondary market which
is different fromcommon stock market/exchange.
7) RATINGS: The bond rating system helpsinvestors determine a
company s credit risk.
8 TAXATION: Eurobonds are not subject to taxlargely free from
12. ADVANTAGES & DIS ADVANTAGES FOR COMPANIES TO
There are several advantages for companies to issue
Freedom and Flexibility
Lower cost of issue
Lower interest cost
Against these advantages, there are some disadvantages to
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
ADVANTAGES & DISADVANTAGES FOR INVESTOR TO
There are several benefits to an investor who does put its
money into Eurobonds”:
Tax free income
Low Risk investment
Convertible to Equity
13. 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.
Definition of 'Foreign Bond':-A bond that is issued in a domestic
market by a foreign entity, in the domestic market's currency. A
foreign bond is most often issued by a foreign firm to raise capital
in a domestic market that would be most interested in purchasing
the firm's debt. For foreign firms doing a large amount of business
in the domestic market, issuing foreign bonds is a common
practice. Types of foreign bonds include bulldog bonds, matilda
bonds and samurai bonds.
Investopedia explains 'Foreign Bond':-Foreign bonds are
regulated by the domestic market authorities and are usually
given nicknames that refer to the domestic market in which they
are being offered. Since investors in foreign bonds are usually the
residents of the domestic country, investors find them attractive
because they can add foreign content to their portfolios, without
the added exchange rate exposure.
A debt security issued by a borrower from outside the country in
whose currency the bond is denominated and in which the bond is
sold. A bond denominated in U.S. dollars that is issued in the
United States by the government of Canada is a foreign bond. A
foreign bond allows an investor a measure of international
diversification without subjection to the risk of changes in relative
14. Three characteristics of foreign bonds
A foreign bond has three distinct characteristics:
The bond is issued by a foreign entity (such as a
government, municipality or corporation)
The bond is traded on a foreign financial market
The bond is denominated in a foreign currency.
Bond markets in India have witnessed a sea change since the
early 1990s. The government securities market has practically
emerged since the mid-1990s. Trading platforms and settlement
mechanisms have improved and new instruments have been
experimented with, with varying degrees of success. In
comparison, with practically no new primary market issuance of
corporate bonds (except in the private placement segment), the
current state of the corporate bond market in India is till nascent
although in the last 2-3 years it has witnessed significant reform
activities. The package of regulatory and infrastructural changes
recommended by the Patil committee in 2005, partly implemented
already, is likely to increase the primary and secondary market
activity.The market for asset securitization in India is relatively
small but has demonstrated significant growth in recent years.
Asset-backed securities have led the market with mortgagebacked securities lagging. Corporate loan securitization is also
considerable but mostly in the form of single loan sell-offs rather
than pools of loans as in Collateralized Debt Obligations (CDOs)
as securities. Securitization of trade credit or receivables is yet to
15. Bonds are debt securities in which an investor purchases a bond
from a government or a corporation and holds that bond until it
comes due. At that time, the issuer of the bond will pay the
interest earned by the bond in full. In India, there are several
types of bonds available to investors, including ones that are only
sold privately and a tax-savings bond that releases the investor of
a tax burden. DEFINITION : Bonds issued and traded within
the internal market of a country and denominated in
the currency of that country.
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
Public Sector Undertaking Bonds
If you're looking for a medium- to long-term investment
in the Indian bond market, a Public Sector Undertaking
bond can be a good choice. PSUs are issued and
backed by the government of India, but they're usually
sold on a private basis. In other words, the Indian
government targets investors themselves and offers the
bonds to these investors at fixed rates. An investment
banker usually only serves as a middleman in this
16. Corporate Bonds
These are more traditional bond instruments, which are
offered by private corporations in India for terms that
can last up to 15 years. Unlike the government bonds
mentioned earlier, anyone can purchase a corporate
bond. However, there is a higher risk of default and that
can depend upon the corporation backing the bond,
market conditions, the company's industry and its
investment rating. But the risk comes with a higher
return on the investment.
Financial Institutions and Banks
Bonds issued by financial institutions and banks in India
are a vibrant financial instrument and make up more
than 80 percent of the bond market in that country. The
reasons are simple. Bonds issued by financial
institutions and banks are regulated well and come with
good bond ratings. Large-scale investors are some of
the most important investors in this category.
Emerging Markets Bonds
These bonds, issued by the Indian government, are
issued abroad as hard currency to raise capital for
economic development in third-world countries. What's
different about these bonds is that they are usually
issued in U.S. dollars or the Euro, which can make
them more attractive to investors in those countries.
Also making these EM bonds attractive is the interest
rate, which while high is typically paid by the issuer.
The risk comes in that countries like India have a lower
17. credit rating and the success of the bonds is tied to the
success of the country's economic development.
The Indian government issues special bonds that allow
its citizens to be either partially or fully released from
paying taxes. Most of them are issued by India's
Reserve Bank. These five-year bonds are sold at an
interest rate of 6.5 percent and interest is paid off every
half-year. The upside for the investor is that by
purchasing this bond, they are released from paying
taxes on the related interest income, as long as they
hold the bond until it matures.