Eurobond

What is a Eurobond?

A Eurobond is a type of bond that is issued in a currency other than the currency of the country in which it is issued. Despite the name, Eurobonds are not limited to Europe. It is simply a financial instrument that allows companies, governments or organizations to raise money from international investors in a widely used currency such as the US dollar, euro or yen.

Eurobonds can be thought of as a global financing instrument that gives issuers access to a larger pool of investors and allows investors to diversify their portfolios with international investment opportunities.

Important findings

• Cross-border financing: Eurobonds are issued outside the country of the currency in which they are denominated.

• Currency flexibility: They are often denominated in major currencies such as the US dollar or euro.

• Global accessibility: Both issuers and investors benefit from a broader international market.

• Tax neutrality: Eurobonds are generally issued in countries with favorable tax regimes.

• Not limited to Europe: The name can be misleading - they are used worldwide.

How Eurobonds work

If an organization needs to raise money, it can issue Eurobonds to attract international investors. These bonds are often sold in markets with little regulation, making them quicker and cheaper to issue than domestic bonds.

Example:

1. A company wants to finance a new project in Asia, but does not want to borrow in dollars on the domestic market.

2. It issues a Eurobond denominated in euros and sells it on international markets.

3. Investors from Europe and Asia buy the bond and provide the company with the necessary funds.

Once the bond has been issued, it pays regular interest to investors and repays the capital on maturity - just like a normal bond.

Real-life example: Toyota Eurobond

Japanese car manufacturer Toyota issued a Eurobond denominated in US dollars to appeal to the global market. In this way, Toyota was able to attract investors outside Japan and benefit from the high demand for dollar-denominated assets.

Advantages of Eurobonds

• Access to global markets: Issuers can raise funds from a larger pool of international investors.

• Flexible currency options: They allow companies to issue bonds in a stable or widely used currency.

• Tax efficiency: Eurobonds are often issued in jurisdictions with favorable tax regimes.

• Portfolio diversification: Investors gain access to international issuers and different currencies.

Disadvantages to consider

• Exchange rate risk: For investors, fluctuations in currency values can affect returns.

• Less regulation: Although this simplifies the issuance of Eurobonds, it can also lead to less protection for investors.

• Liquidity risk: Depending on the currency and the market, Eurobonds may not be easily tradable.

Frequently asked questions

Why are they called Eurobonds if they are not limited to Europe?

The name originally comes from their origin in the European financial markets, but nowadays Eurobonds can be issued and traded worldwide.

Are Eurobonds the same as foreign bonds?

Not quite. Foreign bonds are issued in the domestic market by a foreign company (e.g. a Japanese company issuing bonds in the US in dollars). Eurobonds, on the other hand, are issued on international markets and are not tied to a specific country.

Who typically invests in Eurobonds?

Institutional investors such as pension funds, investment funds and insurance companies are the main buyers, but private investors can also gain access to Eurobonds via brokers.

Are Eurobonds risky?

Like all investments, Eurobonds carry risks, including currency fluctuations and issuer default risks. However, they are often considered relatively stable, especially when issued by reputable organizations.