Question

Whatare the differences between foreign bonds and Eurobonds and why Eurobonds makeup the lion’s share of the international bond market?

Answer 1

A foreign bond is a long-term bond that can be issued by governments or companies which are outside of their home country. If a U.S. company were to issue a bond that was denominated in Canadian dollars, then sold to investors in Canada, then a foreign bond would be issued.

What is unique about the foreign bond is that it is usually denominated in the currency of where it is expected to be sold. Many companies issue foreign bonds in the U.S. Dollar because they seek out investors from the United States to fuel their operations.

Foreign bonds may be subject to disclosure requirements, trading regulations, and securities regulations as they are traded on national markets.

A Eurobond is a long-term bond. It is issued and sold outside the country where it has been denominated. Although the implication from the name indicates that Europe is involved, any country can create a Eurobond. If an organization in the United States were to use a bond that was denominated in dollars, then sold that bond to investors in the United Kingdom, then it would qualify as a Eurobond.

The same would be true if that company sold that bond to South Korean investors.
Multi-national companies often issue Eurobonds as a way to finance their global operations. It is very common to issue a Eurobond from one country where they have a presence, then sell it to another country where there are offices as well.

Governments can issue Eurobonds for financing if the wish. At the time of writing, Eurobonds make up about 30% of the total bond market around the world

The Differences Are Important:

Foreign bonds and Eurobonds are two separate investment options. Far too often, however, the terms are used interchangeably. That is because foreign bonds were issued long before the first Eurobonds even existed.

For some investors, a foreign bond is referred to as an international bond. Eurobonds are also referred to as an international bond. For beginning investors, the similarities in these labels is what leads to high levels of confusion.

Then you have the nicknames of the different bonds that become problematic for investors as well. You may have seen some of these terms used to describe bond investment activities in the past.

• Yankee bonds. These bonds are issued in U.S. Dollars, but created by non-American borrowers in the United States.
• Samurai bonds. These bonds are denominated in yen, but then issued by non-Japanese borrowers in Japan.
• Bulldog bonds. These bonds are issued in pounds sterling by non-British borrowers in Britain.

In the three examples listed above, you are looking at foreign bonds. These are not Eurobonds.

The two segments of the international bond market are: foreign bonds and Eurobonds. A foreign bond issue is one offered by a foreign borrower to investors in a national capital market and denominated in that nation’s currency. A Eurobond issue is one denominated in a particular currency, but sold to investors in national capital markets other than the country which issues the denominating currency. Eurobonds make up over 80 percent of the international bond market. The two major reasons for this stem from the fact that the U.S. dollar is the currency most frequently sought in international bond financing. First, Eurodollar bonds can be brought to market more quickly than Yankee bonds because they are not offered to U.S. investors and thus do not have to meet the strict SEC registration requirements. Second, Eurobonds are typically bearer bonds that provide anonymity to the owner and thus allow a means for evading taxes on the interest received. Because of this feature, investors are generally willing to accept a lower yield on Eurodollar bonds in comparison to registered Yankee bonds of comparable terms, where ownership is recorded. For borrowers the lower yield means a lower cost of debt service.