Define differences between foreign bonds and eurobonds, Financial Management

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Describe the differences between foreign bonds and Eurobonds.  Also discuss why Eurobonds make up the lions share of the international bond market.

Answer:  The two segments of the international bond market are:  foreign bonds and Eurobonds.  A foreign bond issue is one provided by a foreign borrower to investors in a national capital market and denominated in that currency of a nation. A Eurobond issue is one denominated in a certain currency, but sold to investors in national capital markets except the country that issues the denominating currency.

Eurobonds make up over 80% of the international bond market.  The two main reasons for this stem from the fact which the U.S. dollar is the currency most often sought in international bond financing.  First, Eurodollar bonds can be brought to market more rapidly as compared to the Yankee bonds because they are not provided to U.S. investors and so do not have to meet the strict SEC registration requirements.

Second, Eurobonds are commonly bearer bonds that provide anonymity to the owner and so allow a means for evading taxes on the interest received.  Due to this feature, investors are generally willing to recognize a lower yield on Eurodollar bonds in comparison to registered Yankee bonds of comparable terms, in which ownership is recorded.  For borrowers the lower yield means a lower cost of debt service.


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