Eurobond

What It Is

A eurobond is a bond denominated in a currency not native to the issuer's home country. Eurobonds are commonly issued by governments, corporations, and international organizations.

How It Works

Let's assume Company XYZ is headquartered in the United States. Company XYZ decides to go to Australia to issue bonds denominated in Canadian dollars. This is an example of a eurobond. In many cases, an issuer sells its eurobonds in a number of international markets. Company XYZ might sell its Canadian dollar-denominated bonds in Japan and Canada too.

Eurobonds are not the same as foreign bonds. An example of a foreign bond is a bond issued by U.S.-based Company XYZ in Australia and denominated in Australian dollars -- the home currency of the market in which the bonds are issued.

Eurobonds often trade on an exchange -- most often the London Stock Exchange or the Luxembourg Stock Exchange -- and they trade much like other bonds. The eurobond market is considered somewhat less liquid that the traditional bond market, but is still very liquid.

Eurobonds are usually "bearer bonds," meaning that there is no transfer agent that keeps a list of bondholders and arranges the interest and principal payments. Instead, holders receive interest when they present the coupon to the borrower, and receive the principal when the bond matures and the holder presents the physical bond certificate to the borrower.

Like other bonds, eurobonds obligate the borrower to pay a certain interest rate and principal amount according to the terms of the indenture. However, eurobonds often pay interest annually rather than semiannually, like U.S. corporate bonds.

The less-frequent coupons make eurobonds somewhat less valuable -- and thus require higher yields -- than traditional U.S. corporate bonds. Even if both investors receive the same amount of interest every year, the difference in payment frequency means that investors should compare eurobonds to other bonds very carefully.

Why It Matters

Eurobonds give issuers the opportunity to take advantage of favorable regulatory and lending conditions in other countries. Eurobonds are not usually subject to taxes or regulations of any one government, which can make it cheaper to borrow in the eurobond market as compared to other debt markets.

Borrowing in foreign currencies also present risks in addition to the standard credit risk and interest rate risks. Eurobonds are exposed to exchange rate risk, and because exchange rates can change quickly and dramatically, the total return on a eurobond can be affected dramatically in a very short amount of time.

Read on to learn about one of the safest bonds known to man: What are the Advantages of PET Bonds?

Source: Investing Answers