1.6 Asset Classes- Eurobonds Flashcards
Name some examples of Eurobonds…
There are plain vanilla, fixed-coupon bonds that normally pay the coupons once a year.
Additionally, there are ZCBs and other forms of eurobond such as floating rate bonds and bonds with coupons that increase over time (stepped bonds).
What are Eurobonds?
Essentially, eurobonds are international bond issues. They are a way for an organisation to issue debt without being restricted to their own domestic market. The currency of issue does not need to be the euro,; eurobonds can be issued in any currency as long as it is different to the currency of the place from which they are issued. So, if a eurobond was issued out of London, it would need to be in a currency other than £ sterling, such as the euro or the US dollar. If a eurobond was issued out of Frankfurt, it would need to be in a currency other than the euro, such as the US dollar or Japanese yen. They are generally issued via a syndicate of international banks.
Generally, eurobond issuers do not keep a record of the holders of their bonds; the certificates themselves are all that is needed to prove ownership. This is the concept of bearer documents, when the holder of the certificates (the bearer) has all the rights attached to ownership. Eurobonds are issued in bearer form and, because they are issued internationally, they are largely free of national regulation. Eurobonds have been innovative in their structure to accommodate the needs of issuers and investors.
Why opt for Eurobonds?
An absence of national regulation means that eurobonds can pay interest gross, making the buyer responsible for paying their own tax and avoiding withholding tax (WHT) (tax being withheld in the country of origin). Initially, eurobonds were aimed at wealthy individuals, but as the market has grown they have increasingly become investments held by institutional investors.
Why are Eurobonds immobilised?
An absence of national regulation means that eurobonds can pay interest gross, making the buyer responsible for paying their own tax and avoiding withholding tax (WHT) (tax being withheld in the country of origin). Initially, eurobonds were aimed at wealthy individuals, but as the market has grown they have increasingly become investments held by institutional investors.
Who regulates the Eurobond Market?
As the eurobond market has grown, a self-regulatory organisation has been formed that oversees the market and its participants – the International Capital Market Association (ICMA).
How do Eurobonds settle?
Settlement and accrued interest conventions have been established for the secondary market. Settlement is on a T+2 basis and accrued interest is calculated on the basis of 30 days per month and 360 days per year (30/360 basis).
List the main features:
Form
Interest payments
Tax
Trades matched through
Trades settled through
Settlement period
Trading mechanism
Bearer
Gross
Taxable but untaxed at source
TRAX system
Euroclear or Clearstream
Trade day plus two (T+2)
Over-the-counter (OTC)
How are Eurobonds issued?
- Lead manager typically appoints an international syndicate to act as co-lead managers
- Bond issued simultaneously in several countries
- Fixed price re-offer often applies
- Underwriting often shared across the syndicate
