AN OVERVIEW OF THE EUROBOND
The eurobond is a bond issued in a currency other the currency of the country or market where it is released. Also known as external bonds, it is issued by governments, international syndicates, and private organizations who need borrowings denominated in a foreign currency for a specified time period.
The derivative is not related to Europe or the euro currency. Instead, the term "euro" refers to external currency. Do not confuse "Eurobond" with "Eurobonds". The latter pertain to standard bonds released by the European Union and European governments.
Eurobonds are classified based on the currency in which it is denominated. The nomenclature follows the denominated currency resulting to terms such as Euroyen bond and Eurodollar bonds. Normally, the bonds are provided at fixed interest rates, offering a precise fixed-payment debt scheme for the issuer in the long-term.
Investors can get exposed to foreign investments due to local availability of foreign currency bonds. Most of the Eurobond carry lower face value. Hence, denominating these in foreign currencies and launching them in countries with firmer currencies makes them highly liquid for domestic investors.
For example, an Indian rupee Eurodollar bond issued in the United Kingdom, having a par value of INR 10,000, may appear cheaper to British investors. It will only cost around £102 to them, granted the GBP/INR exchange rate of 102.
The downside is the forex risk is alleviated for the issuer. It is passed onto the investors. For instance, a US-based investor is investing INR 10,000 at a rate of $1 = 50 INR in a three-year long rupee Eurobond. At the beginning, the investor is parting away with $200. However, if the currency rate after three-year maturity becomes $1 = 60 INR, that will be $166.67 only, excluding interest payment.
For issuers, they have the opportunity to release bonds in a country or region of their choice, as well as to choose the currency in floating the Eurobond. Interest rates differ from country to country (or region to region). So, it is important for them to choose a nation with favorable rates.
Let’s say a huge population in Britain comes from Bangladesh, India, and Pakistan. Floating a Eurobond in Britain in a currency of these nations can unveil large investments. Immigrants are sentimental in nature. They are emotionally attached to their country of origin; therefore, they will be investing money in such bonds, granted the issuer is reputable. Through the Eurobond, the firm eases the forex risk. Also, various maturities can be chosen.
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