Presentation On International Bond Market Presented By 26

Presentation On International Bond Market

Presented By. . (26 FIN A 2) v Md. Ariful Islam Chowdhury v Md. Hasibur Rahman v Md. Nuhas Hossain v Md. Sajedur Rahman v Abdullahil Kafi - B 081721 B 081718 B 081720 B 081707 B 081705

Introduction

Changing Nature of the Global Bond Market l l Historically, the U. S. bond market dominated the global bond market, with the U. S. market representing a key source of financing for U. S. and foreign corporations. However, since the expansion of the European Union and the advent of the Euro-Zone, Europe’s importance in the global bond market as grown. – – l In 2001, the U. S represented 44% of the world’s bond market; the European Union represented 28% (the Euro-zone countries: 23%). By 2009, the U. S. share of the global bond market had fallen to 34% and the European Union’s share had grown to 36% (the Euro-zone countries: 30%). While today the U. S. market is dominated by U. S. firms, an increasing of U. S. company bond financing is taking place in the European bond markets.

Nature of Bond l A written and signed promise to pay a certain sum of money on a certain date, or on fulfillment of a specified condition. All documented contracts and loan agreements are bonds.

Bond market l 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. 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 BIS (or alternatively $35. 2 trillion as of Q 2 2011 according to SIFMA)

Worlds Bond Market l The world’s bond market can be divided into two broad groups: Ø Ø Domestic bond market International bond market.

Domestic Bond Market l The domestic bond market is comprised of all securities issued in each country by “domestic” government entities and corporate. – In this case, issuers are domiciled (i. e. , headquartered) in the country where those bonds are traded.

International bond market l The international bond market is comprised of non-residents borrowing in another country’s bond markets The international bond market consists of two groups: v Foreign Bonds and v Eurobonds

U. S. bond market size

International Bond Market Instruments Instrument Frequency of Payment Size of Coupon Payoff at Maturity Straight Fixed-Rate Annual Fixed Currency of issue Floating Rate Note Every 3 or 6 months Variable Currency of issue Convertible Bond Annual Fixed Straight fixed rate with equity warrants Annual Fixed Zero none zero Currency of issue or conversion to equity shares. Currency of issue plus conversion to equity shares. Currency of issue Dual Currency Bond Annual Fixed Dual currency

Bearer Bonds and Registered Bonds l l l 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.

Foreign Bond l l Foreign Bond: - Issued by a foreign borrower to investors in another country and denominated in the currency of that country. Yankee, Samurai, Bulldog bonds. Investors view it as a debt instrument issued by a foreign instead of a domestic borrower. Ford issues offers a bond denominated in SFs to Swiss investors.

Foreign Bonds: Characteristics l Foreign Bonds are bonds issued by a non-resident and denominated in the currency of the country in which it is being placed (i. e. , issued). – l Foreign bonds are subject to the regulations of the country in which the bond is being offered. – l The SEC regulates foreign bond offerings in the U. S. Historically, the most important foreign bond markets have been in Zurich, New York, and Tokyo. – l Example: Ford Motor Corporation issuing a yen denominated bond in Japan Zurich and Tokyo because of low market interest rates; the U. S. because of its large market. Foreign bonds are often swapped out for another currency

History of the Foreign Bond Market l l l l 100 years ago, the international bond markets consisted solely of foreign bonds, that is, bonds issued, placed, and traded in a bond market which was foreign to the issuer's country of incorporation. Issuers were typically foreign governments or private sector utilities such as railway companies. After WW I, the world saw a strong U. S. economy and a strong U. S. dollar. During this period, world capital markets served primarily to channel European savings into the U. S. economy. Issuance activity elsewhere in the international markets remained small. This dominance of the U. S. foreign bond market became even stronger after WW II. For years the U. S. foreign bond market was the largest and most important foreign bond market. In recent years, however, it has been surpassed by the Swiss franc (CHF) foreign bond market. m

Impact of Exchange Rate Changes on Foreign Bond Returns (For U. S. Investors)

Eurobonds l l - Denominated in a specific currency, but sold to investors in a national capital market other than the country of the denominated currency. Swiss borrower issues $-denominated bonds to investors in UK, India, and Japan

l Eurobonds are bonds issued by a non-resident and denominated in other than the currency of the country in which it is being placed. – – l l l The bond’s currency of denomination is referred to as an offshore currency. Example: Coca Cola issuing a U. S. dollar denominated bond in Europe. They are generally issued and sold simultaneously in more than one market and thus the advantage of the Eurobond market is that issuers can raise large sums of capital from investors all around the world. Issuers include national governments, supranational organizations (such as the World Bank), “AAA” corporations and global banks. The U. S. dollar is the dominant currency of denomination for Eurobonds.

History of the Euro. Bond Market l The first Eurobond (which was also a U. S. dollar denominated bond) was the July 1963 issue by the Italian Autostrade (Italian National Highway Authority), led by SG Warburg & Co and issued in London. – l l l $15 million; 5. 5% coupon; 15 year bonds; listed on the London and Luxembourg stock exchanges. By 1972, the market had grown to $5 billion; $42 billion by 1982 and $371 billion by 1995. In the early 1960 s, the Eurobond market was mainly a Eurodollar bond market. Today, the Eurobond market comprises bonds denominated in all the major currencies and several minor currencies. – For example, in 1996, the Eurobond market included issues denominated in the Egyptian pound, Polish zloty and Croatian kuna.

Euro. Bond Market by Currency, Early Years (% of Total Volume)

The Main Features of a Eurobond l l l Eurobonds are not regulated by the country of the currency in which they are denominated. Eurobonds are “bearer bonds”, i. e. , they are not registered anywhere centrally, so whomever holds (or bears) the bond is considered the owner. Bearer status also enables Eurobonds to be held anonymously. The Eurobond market is largely a wholesale (i. e. , institutional market) with bonds held by large institutions. – l l Pension funds, insurance companies, mutual funds Since they are denominated in an offshore currency, investors in eurobonds assume both credit and foreign exchange risks (if the currency if denomination is other than their home currency). Some publically offered eurobonds trade on stock exchanges, normally in London or Luxembourg. Others are placed directly with institutional investors without a listing (private placement).

Types of Eurobonds l Conventional or Straight Eurobonds have a fixed coupon (usually paid on an annual basis) and maturity date when all the principal is repaid. l Floating rate bond notes (FRN) are usually short to medium term bond issues, with a coupon interest rate that “floats, ” i. e. goes up or down in relation to a benchmark rate plus some additional “spread” of basis points (each basis point being one hundredth of one percent). The reference benchmark rate is usually LIBOR (London interbank offered rate) or EURIBOR (Euro interbank offered rate). The “spread” added to that reference rate is a function of the credit quality of the issuer. l Zero-coupon bonds do not have interest payments. l Convertible bonds can be exchanged for another instrument, usually an ordinary share or shares (fixed ahead of time with a predetermined price) of the issuing organization. The coupon payable is usually lower than it otherwise would be. Because convertible bonds can be viewed more as equity shares than bonds, the credit and interest rate risks for investors are higher than with conventional bonds. l High-yield bonds are also part of the Eurobond markets, a class of bonds (rather than a type of bond) which individual investors may encounter. High-yield bonds are those that are rated to be “below investment grade” by credit rating agencies (i. e. issuer has a credit rating below BBB).

Relative Growth of Foreign Bonds and Euro Bonds, Early Years

Relative Growth of Foreign Bonds and Euro Bonds, Later Years

Domestic Versus International Bond Market by Country; % of GDP, 2011

International Bond Market Credit Ratings l l Fitch IBCA, Moody’s , Standard & Poor’s and DBRS sell credit rating analysis. Focus on default risk, not exchange rate risk. Assessing sovereign government debt focuses on political risk and economic risk. Economic risk: external debt, BOP flexibility, economic structure & growth, management of the economy, and economic prospects

Euro-Bond Market Versus U. S. Bond Markets Eurobonds: 1964 - 1969 Eurobonds; 1995 - 2006

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