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Transcript of Intl Bond Mkts- eun and resnick.ppt
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INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Fifth Edition
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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Chapter Objective:
This chapter continues discussion of international
capital markets with a discussion of the structure of
the international bond market.
12Chapter TwelveInternational Bond
Market
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Chapter Outline
The Worlds Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Currency Distribution, Nationality, Type of Issuer
International Bond Market Credit Ratings
Eurobond Market Structure & Practices
International Bond Market Indices
The Worlds Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Currency Distribution, Nationality, Type of Issuer
International Bond Market Credit Ratings
Eurobond Market Structure & Practices
International Bond Market Indices
The Worlds Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Straight Fixed-Rate Issues
Euro-Medium-Term Notes
Floating-Rate Notes
Equity-Related Bonds Dual-Currency Bonds
Currency Distribution, Nationality, Type of Issuer
The Worlds Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Currency Distribution, Nationality, Type of Issuer
International Bond Market Credit Ratings
Eurobond Market Structure & Practices
International Bond Market Indices
The Worlds Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Currency Distribution, Nationality, Type of Issuer
International Bond Market Credit Ratings
Eurobond Market Structure & Practices
International Bond Market Indices
The Worlds Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Currency Distribution, Nationality, Type of Issuer
International Bond Market Credit Ratings
Eurobond Market Structure & Practices
Primary Market
Secondary Market
Clearing Procedures
The Worlds Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Currency Distribution, Nationality, Type of Issuer
International Bond Market Credit Ratings
Eurobond Market Structure & Practices
International Bond Market Indices
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The Worlds Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Currency Distribution, Nationality, Type of Issuer
International Bond Market Credit Ratings
Eurobond Market Structure & Practices
International Bond Market Indices
Chapter Outline
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The Worlds Bond Markets:
A Statistical Perspective:
The total market value of the worlds bond markets areabout 50% largerthan the worlds equity markets.
The U.S. dollar, the euro, the pound sterling, and the yenare the four currencies in which the majority of domesticand international bonds are denominated.
Proportionately more domestic bonds than internationalbonds are denominated in the dollar (44.2 percent versus36.1 percent) and the yen (15.4 percent versus 2.6 percent)
while more international bonds than domestic bonds aredenominated in the euro (47.5 percent versus 21.5 percent)and the pound sterling (8.3 percent versus 2.5 percent).
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Amounts of Domestic and International
Bonds Outstanding
(As of Mid-Year 2007 in Billions of U.S. Dollars)
Currency Domestic Percent International Percent Total Percent
U.S. $ 18,596.10 44.2% 7,129.20 36.1% 25,725.30 41.6%
Euro 9,032.50 21.5% 9,395.80 47.5% 18,428.30 29.8%
Pound 1,033.70 2.5% 1,635.20 8.3% 2,668.90 4.3%
Yen 6,478.20 15.4% 504.8 2.6% 6,983.00 11.3%
Other 6,968.20 16.5% 1,099.00 5.6% 8,067.20 13%
Total 42,108.70 100% 19,764.00 100% 61,872.70 100%
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Amounts of Domestic and International
Bonds Outstanding
18,
596.
10
9,
032.
50
1,
03
3.
70
6
,478.
20
6
,968.
20
42,
108.
70
7
,129.
20
9,
395.
80
1,6
35.
20
504
.8
1,
09
9.
00
19,
764.
00
25,
725
.30
18,
428.
30
2,6
68.
90
6
,983.
00
8,
067.
20
61,
872.
70
0.00
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
60,000.00
70,000.00
U.S.
dollar
Euro Pound Yen Other Total
Domestic
International
Total
(As of Mid-Year 2007 in U.S. $Billions)
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Domestic and International Bonds
Outstanding
0
10
20
30
40
50
60
70
80
90
100
U.S.
dollar
Euro Pound Yen Other Total
Domestic
International
Total
(As of Mid-Year 2007 in U.S. $Billions)
Percen
tage
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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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Security Regulations That Ease Bond Issuance
Shelf Registration (SEC Rule 415)
Allows the issuer to preregister a securities issue, and
then offer the securities when the financing is actually
needed. SEC Rule 144A
Allows qualified institutional investors to trade private
placements.
These issues do not have to meet the strict information
disclosure requirements of publicly traded issues.
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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 bond issues were first offered in 1989.
Global bonds denominated in U.S. dollars and
issued by U.S. corporations trade as Eurobondsoverseas and domestic bonds in the U.S.
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Deutsche Telekom Global Bond
The largest corporate global bond issue to date is the $14.6
billion Deutsche Telekom multicurrency offering.
The issue includes
three U.S. dollar tranches with 5-, 10-, and 30-year maturitiestotaling $9.5 billion,
two euro tranches with 5- and 10-year maturities totaling3
billion,
two British pound sterling tranches with 5- and 30-yearmaturities totaling 950 million,
and one 5-year Japanese yen tranche of 90 billion.
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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
There are two types of equity-related bonds:
convertible bonds and bonds with equity warrants.
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Convertible Bonds
A convertible bond issue allows the investor toexchange the bond for a predetermined number ofequity shares of the issuer.
Thefloor-value of a convertible bond is its straightfixed-rate bond value.
Convertibles usually sell at a premium above the largerof their straight debt value and their conversion value.
Investors are usually willing to accept a lowercoupon rate of interest than the comparablestraight fixed coupon bond rate because they findthe conversion feature attractive.
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Bonds with Equity Warrants
These bonds allow the holder to keep his bond butstill buy a specified number of shares in the firmof the issuer at a specified price.
They can be viewed as straight fixed-rate bonds with theaddition of a call option (or warrant) feature.
The warrant entitles the bondholder to purchase acertain number of equity shares in the issuer at aprestated cash price over a predetermined period of
time.
With a convertible bond, you surrender the bondto get the shares. Here you pay cash and keep thebond.
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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 inpresent value each year, while in Japan, the gain
is a tax-free capital gain.
Pricing is very straightforward:
PV=PAR
(1 + r)T
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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.
0 1 3 4 NN1
$
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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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Ch t i ti f I t ti l B d
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Instrument
Straight Fixed-Rate
Floating Rate Note
Convertible Bond Annual Fixed Currency of issue
or conversion to
equity shares.
Straight fixed rate
with equitywarrants
Annual Fixed Currency of issue
plus conversion toequity shares.
Zero none zero Currency of issue
Dual Currency
Bond
Annual Fixed Dual currency
Frequency of
Payment
Annual
Size of
Coupon
Payoff at
Maturity
Characteristics of International Bond
Market Instruments
Currency of issueFixed
Every 3 or 6 months Variable Currency of issue
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Currency Distribution of International
Bond Amounts Outstanding
(As of Mid-Year 2007 in U.S. $Billions)
Currency 2003 2004 2005 2006 2007
Euro 4,834.50 6,216.00 6,317.80 8,310.10 9,395.80
U.S. $ 4,492.50 4,906.30 5,380.50 6,400.60 7,129.20Pound 778.7 981.8 1,063.70 1,450.00 1,635.20
Yen 488.6 530.5 472.2 487.3 504.8
Swiss franc 195.6 227.9 208.8 253.8 273.5
Canadian dollar 79.3 112.6 146.7 178 232.6Other 233.3 306.7 394.3 649.3 592.9
Total 11,102.50 13,281.80 13,984.00 17,569.10 19,764.00
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Distribution of International Bond Offerings
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Distribution of International Bond Offerings2003 2004 2005 2006 2007
Australia 162 225.5 259.3 352 405
Canada 267.2 294.8 311 346.7 401.1
France 700.8 888.5 937.8 1,197.20 1,309.20
Germany 1,810.30 2,110.20 2,071.80 2,463.80 2,612.80
Italy 510.5 716.4 705.1 903.4 996.6
Japan 255.2 280.7 261.2 304.1 316.3Netherlands 532.8 652.8 680.7 870.4 961.4
U.S. 1,032.10 1,267.90 1,426.30 1,881.30 2,117.00
U.K. 3,011.80 3,262.70 3,446.30 4,297.30 4,947.10
Other Developed Countries 1,559.00 2,090.70 2,320.90 3,191.70 3,774.20
Off-shore Centers 128.9 151.4 173.3 195.7 213
Developing Countries 630.8 790.9 855.6 989.8 1,109.50
International Institutions 501 549.3 534.7 575.7 600.8
Total (in U.S. $Billions) 11,102.50 13,281.80 13,984.00 17,569.10 19,764.0012-25
Distribution of International Bond
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Distribution of International Bond
Offerings by Type of Issuer
2003 2004 2005 2006 2007
Financial
institutions 8,032.50 9,756.70 10,509.00 13,537.50 15,404.50Governments 1,122.30 1,413.80 1,431.90 1,621.90 1,739.90
International 501.1 549.3 534.7 575.8 600.8
Corporate issuers 1,446.60 1,562.10 1,508.50 1,834.00 2,019.00Total
(in U.S. Billions) 11,102.50 13,281.80 13,984.00 17,569.10 19,764.00
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International Bond Market Credit Ratings
Fitch IBCA, Moodys and Standard & Poors
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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Eurobond Market Structure
Primary Market
Very similar to U.S. underwriting.
Secondary Market
OTC market centered in London. Comprised of market makers as well as brokers.
Market makers and brokers are members of the International Capital
Market Association (ICMA), a self-regulatory body based in Zurich.
Clearing Procedures Euroclear and Cedel handle most Eurobond trades.
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Eurobond Practices: Primary Market
A borrower desiring to raise funds by issuing Eurobonds tothe investing public will contact an investment banker andask it to serve as the lead manager of an underwritingsyndicate that will bring the bonds to market.
The underwriting syndicate is a group of investmentbanks, merchant banks, and the merchant banking arms ofcommercial banks that specialize in some phase of a publicissuance.
The lead manager will sometimes invite co-managers to
form a managing group to help negotiate terms with theborrower, ascertain market conditions, and manage theissuance.
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Eurobond Practices: Primary Market
The managing group, along with other banks, will serve as
underwriters for the issue, that is, they will commit their
own capital to buy the issue from the borrower at a
discount from the issue price.
The discount, orunderwriting spread, is typically in the 2 to
2.5 percent range. By comparison, the spread averages about
1 percent for domestic issues.
Most of the underwriters, along with other banks, will be part
of a selling group that sells the bonds to the investing public.
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Eurobond Practices: Secondary Market
Eurobonds initially purchased in the primarymarket from a member of the selling group maybe resold prior to their maturities to other
investors in the secondary market. The secondary market for Eurobonds is an over-
the-counter market with principal trading inLondon. However, important trading is also done
in other major European money centers, such asZurich, Luxembourg, Frankfurt, and Amsterdam.
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Eurobond Practices: Secondary Market
The secondary market comprises market makersand brokers connected by an array oftelecommunications equipment.
Market makers stand ready to buy or sell for theirown account by quoting two-way bid and askprices.
Market makers trade directly with one another,
through a broker, or with retail customers. The bid-ask spread represent market makers only profit;
no other commission is charged.
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Clearing Procedures
Eurobond transactions in the secondary marketrequire a system for transferring ownership andpayment from one party to another.
Two major clearing systems, Euroclear andClearstream International, handle most Eurobondtrades.
Euroclear is based in Brussels and is operated by
Euroclear Bank. Clearstream is located in Luxembourg.
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Clearing Procedures
Both clearing systems operate in a similar
manner.
Each clearing system has a group of depository banks
that physically store bond certificates. Members of either system hold cash and bond accounts.
When a transaction is conducted, electronic book entries
are made that transfer book ownership of the bond
certificates from the seller to the buyer and transferfunds from the purchasers cash account to the sellers.
Physical transfer of the bonds seldom takes place.
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Other Functions of the Clearing System
Euroclear and Clearstream perform other functionsassociated with the efficient operation of the Eurobondmarket. (1) The clearing systems will finance up to 90 percent of the
inventory that a Eurobond market maker has deposited within
the system. (2) The clearing systems will assist in the distribution of a new
bond issue. The clearing systems will take physical possession ofthe newly printed bond certificates in the depository, collectsubscription payments from the purchasers, and record
ownership of the bonds. (3) The clearing systems will also distribute coupon payments.
The borrower pays to the clearing system the coupon interest dueon the portion of the issue held in the depository, which in turncredits the appropriate amounts to the bond owners cashaccounts.
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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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End Chapter Twelve
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