MODULE 8A INTERNATIONAL FINANCIAL MARKETS
International Bond Markets
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CHAPTER OUTLINE
The World’s Bond Markets: A Statistical Perspective
Foreign Bonds and Eurobonds
Types of Instruments
Straight Fixed-Rate Issues
Floating-Rate Notes
Equity-Related Bonds
Zero coupon Bonds
Dual-Currency Bonds
Composite currency bonds
Currency Distribution, Nationality, Type of Issuer
International Bond Market Credit Ratings
Eurobond Market Structure & Practices
Primary Market
Secondary Market
Clearing Procedures
International Bond Market Indices
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THE WORLD’S BOND MARKETS: A
STATISTICAL PERSPECTIVE
The total market value of the world’s bond markets are about 50% larger
than the world’s equity markets.
The U.S. dollar, the euro, the pound sterling, and the yen are the four
currencies in which the majority of domestic and international bonds are
denominated.
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THE WORLD’S BOND MARKETS: A
STATISTICAL PERSPECTIVE
More domestic bonds than international bonds are denominated in the:
Dollar (44.0 percent versus 40.4 percent)
Yen (14.1 percent versus 2 percent)
International bonds than domestic bonds are denominated in the euro (41.5
percent versus 14.7 percent)
Pound sterling (9.3 percent versus 5.6 percent).
Updates: Chinese Yuan (CNY) is increasingly used in bond issuances, reflecting China’s expanding role in international finance.
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DOMESTIC AND INTERNATIONAL BONDS OUTSTANDING
80,000.00
70,000.00
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
U.S. dollar Euro Pound Yen Other Total
sterling
Domestic (in billions) International (in billions)
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FOREIGN BONDS AND EUROBONDS
Bearer bonds Registered bonds 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.
• Note: Bearer bonds are now rare in many markets due to strict anti-money laundering (AML)
regulations, making this mainly a historical example.
Registered bonds are bonds where the owner’s name is registered with the issuer.
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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
Eurobonds overseas 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 maturities totaling $9.5 billion.
Two euro tranches with 5- and 10-year maturities totaling €3 billion.
Two British pound sterling tranches with 5- and 30-year maturities totaling £950 million.
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
Medium term bond with coupon payment indexed to some reference rate.
Coupon payment is quarterly and semiannual.
Common reference rates are 3-month and 6-month U.S. dollar LIBOR.
Since floating-rate notes reset every 6 or 12 months, the premium or discount is usually quite
small.
o New Update: LIBOR has been replaced by SOFR (Secured Overnight Financing Rate) and other alternative rates, as
LIBOR was phased out in 2023.
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EQUITY-RELATED BONDS
There are two types of equity-related bonds:
i) convertible bonds
ii) bonds with equity warrants.
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II) CONVERTIBLE BONDS
A convertible bond issue allows the investor to exchange the bond for a
predetermined number of equity shares of the issuer.
The floor-value of a convertible bond is its straight fixed-rate bond value.
Convertibles usually sell at a premium above the larger of their straight debt
value and their conversion value.
Investors are usually willing to accept a lower coupon rate of interest than the
comparable straight fixed coupon bond rate because they find the conversion
feature attractive.
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II) BONDS WITH EQUITY WARRANTS
These bonds allow the holder to keep the bond but still buy a specified
number of shares in the firm of the issuer at a specified price.
They can be viewed as straight fixed-rate bonds with the addition of a call
option (or warrant) feature.
The warrant entitles the bondholder to purchase a certain number of equity
shares in the issuer at a pre-stated cash price over a predetermined period
of time.
With a convertible bond, you surrender the bond to get the shares. With
equity warrant bonds you pay cash and keep the bond.
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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 an MNC financing a foreign subsidiary.
¥ ¥ ¥ ¥ $
0 1 3 4 N–1 N
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ZERO COUPON BONDS
Zero coupon bonds are sold at a large discount from face value
because there is no cash flow until maturity.
Pricing is very straightforward:
PAR
PV =
(1 + r)T
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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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CHARACTERISTICS OF INTERNATIONAL BOND
MARKET INSTRUMENTS
Frequency of Size of Payoff at
Instrument Payment Coupon Maturity
Straight-fixed rate Annual Fixed Currency of issue
Floating rate note Every 3 to 6 months Variable Currency of issue
Convertible bond Annual Fixed Currency of issue
or conversion to
equity shares
Straight fixed-rate with Annual Fixed Currency of issue
equity warrants plus conversion to
equity shares
Zero coupon bond None Zero Currency of issue
Dual currency bond Annual Fixed Dual currency
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CURRENCY DISTRIBUTION OF INTERNATIONAL
BOND AMOUNTS OUTSTANDING
Currency 2014 2015 2016 2017 2018
U.S. dollar 8,816.50 9,230.20 9,932.90 10,757.90 11,251.20
Euro 8,906.50 8,111.60 7,970.50 9,357.60 9,343.60
Pound sterling 2,083.80 2,004.60 1,693.20 1,964.70 1,917.20
Japanese yen 429.1 403.2 403.2 430.8 450.6
Australian dollar 289.3 257.3 253.3 285.6 258
Swiss franc 304.7 258.9 221.5 209.5 191.3
Other 956.9 818.6 799.5 860 837.7
Total 21,786.80 21,084.50 21,274.10 23,866.10 24,249.70
Source: Compiled from data in Bank for International Settlements Statistics Warehouse.
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DISTRIBUTION OF INTERNATIONAL BOND OFFERINGS
2014 2015 2016 2017 2018
Nationality
Australia 602 582.9 590.4 609 617
Canada 773.7 775.9 822.4 910 940.9
China 84.3 100.2 140.1 192.7 219.4
France 1,549.10 1,386.80 1,393.70 1,527.60 1,456.30
Germany 1,248.90 1,122.70 1,157.20 1,287.80 1,261.40
Japan 234.2 252.9 299.9 395 442
Netherlands 1,961.00 1,805.90 1,816.80 2,095.80 2,086.90
United Kingdom 3,230.60 3,034.00 2,852.40 3,157.50 3,112.80
United States 2,132.90 2,268.60 2,344.00 2,424.60 2,354.40
Other developed countries 4,769.80 4,426.80 4,263.10 4,856.40 4,819.40
Other developing countries 1,739.30 1,777.30 1,953.80 2,237.20 2,359.50
Offshore centers 1,970.60 2,053.40 2,134.80 2,452.90 2,869.90
International organizations 1,490.50 1,461.50 1,505.50 1,719.80 1,709.70
Total 21,786.80 21,084.50 21,274.10 23,866.10 24,249.70
New Update: Increased issuance
in Chinese Yuan (CNY), reflecting Type
its growing importance in global
Financial corporations 15,685.60 15,037.00 14,961.30 16,616.40 16,913.50
finance.
General government 1,617.80 1,528.60 1,616.50 1,847.20 1,899.30
International organizations 1,490.50 1,461.50 1,505.50 1,719.80 1,709.70
Non-financial corporations 2,992.90 3,057.40 3,190.80 3,682.70 3,727.20
Total 21,786.80 21,084.50 21,274.10 23,866.10 24,249.70
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Source: Compiled from data in Bank for International Settlements Statistics Warehouse.
INTERNATIONAL BOND MARKET CREDIT
RATINGS
Fitch IBCA, Moody’s, and Standard & Poor’s sell credit rating analysis.
Focus on default risk, not exchange rate risk.
Assessing sovereign debt focuses on political risk and economic risk.
o New Update: ESG (Environmental, Social, and Governance) factors are increasingly integrated into
credit rating assessments, affecting ratings based on sustainability practices.
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S&P GLOBAL RATINGS
Source: [Link]
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Source: From S&P Global Ratings, Sovereign Rating Methodology, Dec 18, 2017, [Link] 24
EUROBOND MARKET STRUCTURE
Primary market
Issued through syndication by investment banks, which underwrite and distribute Eurobonds to investors.
Secondary Market
OTC Market centered in London, with other key hubs in Zurich, Luxembourg, Frankfurt, and Amsterdam.
Includes Market Makers (providing liquidity) and Brokers (facilitating transactions).
Participants are often members of the International Capital Market Association (ICMA), a self-regulatory body
based in Zurich.
Clearing Procedures
Euroclear (Belgium) and Clearstream (formerly Cedel, Luxembourg) handle the majority of Eurobond trades.
Emerging digital clearing solutions, such as blockchain, are being explored, but Euroclear and Clearstream remain
dominant.
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I) EUROBOND PRACTICES: PRIMARY MARKET
A borrower desiring to raise funds by issuing Eurobonds to the investing
public will contact an investment banker and ask it to serve as the lead
manager of an underwriting syndicate that will bring the bonds to
market.
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I) EUROBOND PRACTICES: PRIMARY MARKET
The underwriting syndicate is a group of investment banks, merchant
banks, and the merchant banking arms of commercial banks that
specialize in some phase of a public issuance.
The lead manager will sometimes invite co-managers to form a managing
group to help negotiate terms with the borrower, ascertain market
conditions, and manage the issuance.
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I) EUROBOND PRACTICES: PRIMARY MARKET
The managing group, along with other banks, will serve as underwriters for the issue. They
will commit their own capital to buy the issue from the borrower at a discount from the
issue price.
The discount, or underwriting 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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I) EUROBOND PRACTICES: PRIMARY MARKET
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I) EUROBOND PRACTICES: PRIMARY MARKET
Summary
o Issuers contact investment banks to form an underwriting syndicate.
o Underwriting Syndicate: Lead managers negotiate terms, buy bonds at a discount, and resell to public.
o Selling Group: Network of banks that distribute bonds to investors.
o Example: Underwriting spread for Eurobonds is around 2%, higher than for domestic bonds.
o New Update: Some issuers are exploring digital issuance platforms to streamline the issuance process, although
traditional methods remain dominant.
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II) EUROBOND PRACTICES: SECONDARY MARKET
Eurobonds initially purchased in the primary market from a member of the
selling group may be 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 in London. However, important trading is also done in
other major European money centers, such as Zurich, Luxembourg,
Frankfurt, and Amsterdam.
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II) EUROBOND PRACTICES: SECONDARY MARKET
The secondary market consists of market makers and brokers connected by an
array of telecommunications equipment.
Market makers stand ready to buy or sell for their own account by quoting
two-way bid and ask prices.
Market makers trade directly with one another, through a broker, or with retail
customers.
The bid-ask spread represents a market maker’s only profit; no other
commission is charged.
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II) EUROBOND PRACTICES: SECONDARY MARKET
Summary
o Over-the-counter (OTC) market mainly in London, with key centers in Zurich, Luxembourg, Frankfurt, and
Amsterdam.
o Market Makers: Provide liquidity through bid-ask spreads.
o Example: OTC trading allows bonds to be bought/sold before maturity, enhancing liquidity.
o New Update: Increased use of electronic trading platforms for Eurobond transactions, improving liquidity and
accessibity
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CLEARING PROCEDURES
Eurobond transactions in the secondary market require a system
for transferring ownership and payment from one party to another.
Two major clearing systems, Euroclear and Clearstream
International, handle most Eurobond trades.
Euroclear is based in Brussels and is operated by Euroclear Bank.
Clearstream is located in Luxembourg.
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CLEARING PROCEDURES
Euroclear and Clearstream (formerly known as Cedel) handle the majority of Eurobond trades. These two
international central securities depositories (ICSDs) provide clearing, settlement, and custody services for
international securities, including Eurobonds.
• Euroclear, based in Belgium, is widely used for settlement of securities transactions, particularly for bonds.
• Clearstream (the successor of Cedel, now part of Deutsche Börse), based in Luxembourg, similarly serves as a major
clearing and settlement provider.
Both Euroclear and Clearstream offer highly efficient and secure systems for the international bond
markets, making them the primary platforms for Eurobond transactions. While blockchain and other
digital technologies are being explored for bond clearing and settlement, they have not yet replaced the
central role of Euroclear and Clearstream in the Eurobond market.
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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 transfer funds from the purchaser’s cash account to the seller’s.
Physical transfer of the bonds seldom takes place.
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INTERNATIONAL BOND MARKET INDICES
There are several international bond market indices.
JPMorgan 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 of Module
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