Eurobonds are debt instruments issued in currencies that are not native to the countries where they are used.
What Are Eurobonds?
Euroyen is sent in Japanese yen, and eurodollar bonds are sent in U.S. dollars. Most eurobonds are bearer bonds that are traded through platforms such as Euroclear and Clearstream.
- Alternate name: External bonds.
How Eurobonds Work
Imagine that a U.S.-based firm wants to expand into India’s market. Before it can do so, it needs to raise capital to build some retail spaces.
The cost to build these spaces will be paid in Indian rupees, but the firm may not have a credit history in India. This is when the firm may decide to issue a bond in the U.S. in the form of rupees.
The company pays less for the cost of borrowing money. At the same time, U.S. investors gain from a diverse investment. These eurobonds have become more popular with the rise in people doing business around the world.
Eurobonds with an upper-case E are not the same as eurobonds. The former refers to a bid for joint bonds issued by Eurozone countries. Jointly issued Eurobonds would help lower borrowing costs for weaker members of the Eurozone, such as Italy or Spain.
In 1963, Autostrade, an Italian motorway network, offered 60,000 15-year bearer bonds with a face value of $250 U.S. and a 5.5% yearly coupon.
The firm chose to issue the bonds in U.S. dollars instead of Italian lira. This was done to avoid the interest equalization tax in the U.S. The bonds became the world’s first eurobonds, as they were given in Italy in U.S. dollars rather than Italian lira.
Many eurobonds are called by unique names that are used among traders and investors. For instance, the term Samurai bond refers to Japanese yen-denominated eurobonds. The term Bulldog bond refers to eurobonds given in British pounds.
It’s vital to know that eurobonds aren’t the same as foreign bonds. Foreign bonds are bonds that are issued by foreign borrowers in a country’s domestic capital market and issued in their currency.
Foreign bonds are underwritten by a domestic banking union in accord with the securities laws of the country, Eurobonds do not have to be registered before purchase and are subject to disclosure rules.
Pros and Cons of Eurobonds
Before adding eurobonds to your investments, you should weigh their pros and cons. Look at how global investors invest in them.
One of the best things about eurobonds, compared to foreign bonds, is less regulation and greater flexibility.
Eurobond disclosures are governed by market practice rather than an official agency. This lets issuers avoid legal paperwork, reduce costs, and issue the bonds more quickly. Issuers can also be flexible by issuing bonds in the country and the currency of their choice.
Unique grouping of investments in other countries.
Better pricing and cash flow.
Lower par value and no automatic withholding of taxes.
Increased risk due to no domestic regulation.
Investor must figure out their withholding taxes.
Foreign exchange risk, such as an adverse change in the exchange rate before the deal is done.
For those who invest in them, eurobonds offer lower par values. They aren’t subject to automatic withholding taxes like many foreign bonds. The bearer bond nature of eurobonds means that firms don’t have to disclose interest payments to taxing bodies. It’s up to people to declare the income they receive from these bonds.
Competition is also much greater in the eurobond market than the foreign bond market. This fact translates to better pricing and liquidity.
The main drawback of eurobonds is that they’re not regulated in their home country. This could increase their risks. People who invest must also find and handle withholding taxes on their own rather than having them automatically withheld or reported to tax authorities.
People who invest must also factor in any foreign exchange risks that come along with the issues. which can be volatile when dealing with new markets.
People who want to invest in these bonds should be sure to conduct their own research to ensure they have comfort with the terms and risks that come along with the bonds.
These bonds should also be added to a diversified portfolio to lessen risks stemming from any single country, currency, or asset class. It’s a good idea to consult with a financial advisor or broker before buying eurobonds to learn about these unique risk factors.
How to Invest in Eurobonds
Eurobonds can be bought in the same way as most other bonds through global stock exchanges. Right now, the Luxembourg Stock Exchange and the London Stock Exchange are the two biggest hubs for investing in eurobonds, Still, there are many around the world.
- Eurobonds are global debt instruments given in a currency that is not that of the country they are issued in.
- They are subject to less rules, and taxes are not automatically withheld.
- They can be bought through many global stock exchanges.
- It's crucial to not rely on any one currency.