Alternate name: External bonds.
For example, 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.
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 might not have a credit history in India. That 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.
Notable Happenings
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, in order 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. It’s vital to know that eurobonds aren’t the same as foreign bonds. Foreign bonds 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 accordance 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.
Pros Explained
Flexibility and less red tape: Eurobond disclosures are governed by market practice rather than an official agency, letting 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. Lower par value and no automatic withholding of taxes: 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. Better pricing and liquidity: Competition is also much greater in the eurobond market than the foreign bond market. This fact translates to better pricing and liquidity.
Cons Explained
Increased risk due to no domestic regulation: The main drawback of eurobonds is that they’re not regulated in their home country. This could increase their risks.Investor must figure out their withholding taxes: People who invest must also find and handle withholding taxes on their own rather than having them automatically withheld or reported to tax authorities.Foreign exchange risk: People who invest in eurobonds must factor in any foreign exchange risks that come along with them, such as an adverse change in the exchange rate before the deal is done.
What It Means for Individual Investors
Eurobonds are a good investment choice to be added to a diversified portfolio to lessen risks stemming from any single country, currency, or asset class. It’s important to keep in mind that as with all investments, they do come with some risks. In particular, they can be volatile when dealing with new markets. 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, but there are many around the world.
