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Eurobond



Definition

A Eurobond is a debt instrument that is denominated in a currency other than that of the country in which it is issued. It is an international bond, issued and traded outside the borders of the issuing company’s country. Eurobonds are used by countries, corporations, or other entities to raise capital in a foreign currency.

Phonetic

The phonetic pronunciation of the word “Eurobond” is: /ˈjuːrəʊbɒnd/

Key Takeaways

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  1. Eurobond refers to a debt instrument that is denominated in a currency not native to the issuer’s home country. Usually, these are issued by international syndicates and companies for trading in external markets.
  2. Eurobonds carry both the credit risk of the issuing entity as well as the currency risk for the investor depending on their home currency. This dual-risk nature makes investing in Eurobonds more complex but potentially more rewarding.
  3. Considering their global trading nature, Eurobonds provide an opportunity for diversification and flexibility for investors. They can also offer better returns due to their interest rates often being higher than domestic bonds.

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Importance

Eurobonds are significant in the business and finance world as they offer a means of raising capital across international borders. They are issued in a currency other than that of the country where they are issued, facilitating investment and trading between countries and companies globally. This ability to diversify currency risk makes them attractive to investors. Additionally, Eurobonds often have less stringent regulatory requirements compared to domestic bonds, making them a more flexible financing option for organizations. Furthermore, they contribute to the development of global capital markets, ultimately fostering economic growth. These factors combined make Eurobonds an important instrument in the global financial landscape.

Explanation

Eurobonds serve as a significant finance instrument utilised primarily by corporations, governments, and, occasionally, supranational organisations in need of foreign currency. The substantial purpose of Eurobonds is to collect capital across markets with different currencies for either expansion engagements or financial restructuring. It allows these entities to bear the cost in a currency they have the best rates in, providing greater flexibility in terms of the currency in which their debt is denominated. As such, it broadens the borrowing options of the issuer and offers investors another vehicle to diversify the currency risk of their investment portfolios.Furthermore, Eurobonds play a decisive role in global financial integration due to their cross-border nature, allowing efficient allocation of capital worldwide. Issuers can take advantage of international interest rate differences and profit from more favourable conditions in foreign financial markets. In many cases, Eurobonds could be issued in markets where regulation is less strict or where tax laws are more favourable, making them a very attractive financing option. Therefore, Eurobonds enable the issuer to tap into the capital they need while offering investors the opportunity to gain exposure to foreign interest.

Examples

1. Asian Development Bank Eurobond: In 2020, the Asian Development Bank (ADB) issued a 5-year global Eurobond worth $4 billion. It was used to reduce the cost of borrowings for its member countries and to finance their development activities. 2. Google’s Eurobond: In 2014, Google Inc. issued multi-tranche Eurobonds worth $1 billion to take advantage of the low interest rates in Europe. The issuance involved two-year, five-year, and ten-year Eurobonds to finance the company’s general corporate purposes, including acquisitions.3. Apple’s Eurobond: In 2015, Apple Inc. raised €2.8 billion from the sale of its first-ever Eurobonds that mature in eight and twelve years. The sale allowed Apple to take advantage of the low interest rates in Europe and diversify its funding sources.

Frequently Asked Questions(FAQ)

What is a Eurobond?

A Eurobond is a bond that is denominated in a currency other than that of the country where it is issued. Frequently, these are issued in U.S. dollars, but they can be in any currency. They can be issued by governments, international organizations, or private corporations.

Who issues Eurobonds?

Eurobonds are most frequently issued by international organizations, governments, and corporations that are looking to raise funds in a specific currency.

Why would a company issue Eurobonds?

A company might issue a Eurobond as a way to borrow money in a currency with lower interest rates than their domestic currency. It also allows companies to access a more extensive range of investors and diversify their funding base.

Are Eurobonds restricted to being issued within Europe?

No, despite the name, Eurobonds are not restricted to Europe. They can be issued and traded globally, outside the home country of the currency in which they are denominated.

How does a Eurobond work?

The issuer pays the bondholder annual interest payments during the life of the bond known as the coupon rate. At maturity, the face value of the bond is repaid to the bondholder.

What are the risks associated with Eurobonds?

The main risk associated with Eurobonds is currency risk. If the bond is denominated in a currency that decreases relative to the investor’s home currency, potential returns can be reduced. Other risks include credit risk (the issuer may default) and interest rates risk (a rise in interest rates could lessen the bond’s value).

What are the advantages of investing in Eurobonds?

Eurobonds offer the advantage of diversification into different currencies and economies. They can also potentially offer higher yields than domestic bonds and may provide tax advantages, as they are typically issued in jurisdictions with lower withholding tax.

Can individual investors buy Eurobonds?

Yes, individual investors may buy Eurobonds, and they are an excellent way for these investors to diversify their portfolios geographically and by currency. However, individuals should be aware of the potential risk factors involved, such as currency and credit risk.

Related Finance Terms

  • International Bonds
  • Yield
  • Fixed Interest Rates
  • Sovereign Debt
  • Underwriting Syndicate

Sources for More Information


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