Question

In: Finance

Please answer the below question in detail. I can't award credit if directions are not followed....

Please answer the below question in detail. I can't award credit if directions are not followed.

What is the relationship international bond and domestic bond market from operating, investing, and financing activities for a company?

Solutions

Expert Solution

I believe the question is in the perspective of corporate bond markets.

International bond markets and domestic bond markets cater to different needs and sizes of companies.

From Operations point of view:

Domestic markets cater in particular for smaller, growing companies with limited operations and less capital needs. However the international markets enable large companies and conglomerates to draw on global pools of capital, including those which represent the savings and pensions of individuals, for major development projects.

From Investing and Financing Point of view:

Emerging Market Economies (EME) firms issue less frequently in offshore bond markets than do firms of small advanced economies.

Offshore bonds are those issued in a primary market outside the home country of the entity guaranteeing the bond. The major offshore markets are those of the European Union (Eurobonds) and the United States (Yankee bonds). These two locations account for the bulk of international bond market activity.

Firms’ demand for offshore bond financing depends on their ability to raise funds locally. If borrowing in domestic markets is relatively constrained, as is the case in less developed domestic financial markets, an easing of external financing conditions increases the incentive to issue debt offshore.

Second, offshore bond proceeds tend to be associated with increased investment in short-term assets.

This could raise financial stability concerns. In particular, an increased volume of such investments could pose the risk of sudden reversals and might amplify financial cycles. In contrast, onshore bond proceeds are not linked to higher holdings of short-term assets.

International Bond Markets enable institutional investors to obtain diversified and constant returns. International markets, together with the domestic markets, provide the additional capacity and the international access needed to ensure that capital flows freely to those who can use it. Domestic lending and corporate bond markets cater for corporate issuers and investors who do not want foreign exchange risk. But domestic markets are often not big enough for large companies and multinationals seeking large sums for major business development projects, whose needs can be met by the much larger pool of investors in the international corporate bond markets. And domestic markets cannot cater for foreign currency requirements of multinationals, who wish to match their funding currency with that in which they incur expenditure.

Source:

Economic Importance of the Corporate Bond Markets | www.icmagroup.org

Domestic financial markets and offshore bond financing José María Serena and Ramon Moreno


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