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CHAPTER 12 - INTERNATIONAL BOND MARKET Who cares? 1) Financial officer of a MNC issuing bonds in the intl. bond market and 2) Intl. investors, fund managers investing in intl. fixed income securities, seeking highest return, diversified bond portfolio. WORLD BOND MARKETS See Exhibit 12.1, p. 294. $51 trillion face value worth of bonds outstanding worldwide in 2003 vs. about only $28T worth of equity in developed countries (p. 314). Almost 2X as much debt as equity. Domestic bonds are approx. 78% of the world bond market ($40.3T/$51.4T), International bonds are about 22% ($11T/$51T). Domestic bonds : U.S. companies issuing bonds in U.S. in dollars, Japanese firms issuing bonds in Japan in Yen, German companies issuing debt in Europe in euros, etc. International Bonds : MNCs issuing debt in a foreign bond market, either in their own currency or a foreign currency. Example: GM issuing bonds in the UK, denominated in either BPs or USDs. Note: 84% of the intl. bond market is USD or euros. INTL BONDS - $11T (22% of Market) 1. Foreign Bonds (20%) - Bond issued by a domestic company in a foreign market , denominated in the foreign currency . Examples: German MNC (Daimler) issues bonds in U.S. in dollars. Toyota issues bonds in U.S. in dollars. GM issues bonds in U.K. in pounds or in Germany in euros. U.S. railroads issued foreign bonds in U.K. (payable in BPs) in the 1800s to finance railroad construction. 2. Eurobonds (80%) - Bond issued by a domestic company in a foreign market, in a currency other than the currency of the foreign country. Example : U.S. MNC (GM) issues bonds in Europe, payable in U.S. dollars, i.e. a dollar Eurobond or Eurodollar bonds. (Yen Eurobond/Euroyen bonds, SF Eurobonds/EuroSF bonds, etc.) Example : GM simultaneously issues bonds in USD ($), in both U.S. (domestic) and Europe (Eurobonds). The three markets (Domestic, Foreign and Eurobond) compete with each other. See Exhibit 12.2, page 294. In 2003, 71% of intl. bonds were fixed rate, 26% variable rate, 3% Equity-related (convertible to equity, or with equity options: warrants). Bearer bonds vs. Registered Bonds Bearer bond - Most Eurobonds are unregistered, issuing firm or underwriter does not keep records of ownership. Possession is evidence of ownership, like cash. BUS 466/566: International Finance – CH 12 Professor Mark J. Perry 1
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Registered bond - Ownership is recorded by either name or serial number. U.S. law requires U.S. bonds to be registered, both domestic bonds and foreign bonds issued in U.S. ( Yankee bonds ). Upon any sale in secondary market, a new bond certificate is issued. Bearer bonds are more desirable to many investors than registered bonds, possibly for tax evasion reasons. Prices are slightly higher (premium) and YTMs slightly lower, ceteris paribus, on bearer bonds vs. registered bonds. Int'l. Bond Regulation -
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This note was uploaded on 11/18/2011 for the course ECON 351 taught by Professor Westbrook during the Fall '08 term at Rutgers.

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