Lecture 14: The International Bond
With Discussion of The
Globalization of the World’s
Where is this Financial Center?
Financial Market Globalization
Financial market globalization refers to the
integration of national financial markets.
This process can be represented by:
(1) various financial institutions including banks and
institutional investors expanding their activities
geographically, thus acting as intermediaries to
channel funds from lenders to borrowers across
national borders and
(2) securities markets becoming more cross-border
Bottom line: Financial market globalization has
greatly expanded the range of borrowing,
lending and investing possibilities available to
economic agents (companies, governments,
individuals) throughout the world.
History of Financial Market
Some researchers argue that the integration of
financial markets, when measured by cross-border
capital flows across national borders, is not a new
For example, in the 50 years prior to WWI (1914),
the world saw massive capital flows from Western
Europe to overseas regions of recent settlements
(mainly the Americas).
During this time, private capital moved cross border
with essentially no restrictions, much of it going into
bonds financing railroads and other infrastructure
investment and long term government debt.
Measuring Financial Market
Bordo, Eichengreen and Kim (1998) argued that
a good indicator of cross-border financial flows
is the absolute value of the ratio of current
account balance over GDP, averaged across a
number of countries.
Current account balance = (imports of goods and
services – exports of goods and services) + net
returns on investments abroad. Thus it measures the
excess of payments to foreigners over payments
received from foreigners.
Their research showed that this indicator has
increased somewhat since the mid-1960s but
still remains below the levels seen from the
mids-1870s to 1914 (see next slide).
Ratio of Current Account Balances
to GDP for 12 Counties
Measuring Financial Market
Other measures of financial market globalization
examine trends in “financial home bias,” i.e., the
tendency for domestic saving to be invested at
According to IMF data, recent years have seen a
pronounced decline in financial home bias, with
a record fraction of global saving going to cross-
Since the mid 1980s, the trend toward greater cross-
border investment has been world wide approaching
50% for the first time, with the United States, other
advanced economies, and emerging economies all
investing a markedly higher fraction of their savings
abroad (see next slide).
Cross Border Investment Share of
Global Savings (5-Year Moving Average
to Smooth out Business Cycles)
Origins of Recent Financial Market
The recent upsurge in financial market globalization can
probably be traced to the demise of Bretton Woods in the
The move towards floating exchange rates (with less
government intervention) ushered in an era of progressive
dismantling of controls on cross-border financial flows as
well as the liberalization of national financial markets more
In addition, technological advances played a key role.
Information systems are now able to compute and store more
data more rapidly. Telecommunications networks have made it
possible to connect in more efficient ways.
As a result, cross-border financial deals have become both easier
and more secure, effectively lowering the barrier constituted by
Major Deregulations of Financial
Markets: U.K. and Japan
U.K. 1979: Margaret Thatcher removed all
exchange controls on the pound.
Japan 1984: Yen-Dollar Agreement:
Opened up access of Japan’s financial markets to
Removal of controls regarding conversion of yen in FX
Permitted yen offshore transactions.
U.K. 1986: “Big Bang, “ London stock exchange:
Removal of barriers to foreign brokers on the
Implications of Financial Market
The globalization of financial markets has resulted
individual markets become more integrated and
more open to non-resident borrowers and investors.
As a result, opportunities for obtaining capital and
investing capital have widened.
Today it is commonplace for a corporation to consider
raising capital in foreign countries and denominating in any
one of a number of currencies.
Today it is also commonplace for an investor to consider
investing in foreign countries and doing so in any one of a
number of currencies.
Evolution of the Global Bond
Historically, the U.S. bond market dominated the global
bond market, with the U.S. market representing a key
source of financing for U.S. and foreign corporations.
However, since the expansion of the European Union and
the advent of the Euro-Zone, Europe’s importance in the
global bond market as grown.
In 2001, the U.S represented 44% of the world’s bond market; the
European Union represented 28% (the Euro-zone countries: 23%).
By 2009, the U.S. share of the global bond market had fallen to
34% and the European Union’s share had grown to 36% (the
Euro-zone countries: 30%).
While today the U.S. market is dominated by U.S. firms,
an increasing amount of U.S. company bond financing is
taking place in the European bond markets.
Trends in Debt Markets, 2001 -
Institutional Arrangements in
The historical institutional patterns of corporate borrowing
in various countries have influenced the development the a
country’s long term capital markets (i.e., both bond markets
and equity markets).
In Japan and Germany, companies have relied less on equity
markets for funds than their counterparts in the U.S. In both of
these counties, banking has been a relatively more important
source of funds (see next slide).
Japan: Keiretsu arrangements: interlocking business relationships
Germany: The German law allows banks to hold equity shares in
In Europe, the close ties between banks and their corporate
clients slowed the development of a European corporate bond
That changed, however, with the launch of the euro in 1999, which
promoted the development of Europe’s bond market (see slides 17 and
Importance of Banking Markets for
the U.S., Japan and Germany
Bond Market Growth in Europe:
Pre and Post the Euro
Growing Importance of Bond
Markets in Europe
Classifying the World’s Bond Markets
The world’s bond market can be divided into two
(1) the domestic bond market and
(2) the international bond market.
The domestic bond market is comprised of all
securities issued in each country by “domestic”
government entities and corporates.
In this case, issuers are domiciled (i.e., headquartered) in
the country where those bonds are issued.
The international bond market is comprised of non-
residents borrowing in another country’s bond
The distribution of these two bond markets varies
considerable by country (see next slide).
Domestic Versus International Bond
Market by Country; % of GDP, 2009
The International Bond Market
The international bond market is normally
divided into two groups:
(1) Foreign Bonds
The distinction between the two is essentially the
currency that the bond is denominated it.
Foreign bonds: denominated in the currency of the
country in which it is being issued.
Euro-bonds: denominated in an offshore currency (i.e.,
In recent years, the Eurocurrency bond market
has dominated the international bond market
(see next slide).
Relative Growth of International
Bond Market (% of Total)
Classification 1978 1980 1981 1983 1984 1990-95
by Type of
Foreign Bonds 58.8% 46.7% 39.6% 35.1% 25.4% 18.2%
Eurobonds 42.0% 53.3% 60.4% 54.9% 74.6% 81.8%
Amount $35.7 $38.3 $51.8 $77.2 $109.5 $2,200
(Billions USD) (total)
Foreign Bonds: Characteristics
Foreign Bonds are bonds issued by a non-resident
and denominated in the currency of the country in
which it is being placed (i.e., issued).
Example: Ford Motor Corporation issuing a yen denominated
bond in Japan
Foreign bonds are subject to the regulations of the
country in which the bond is being offered.
The SEC regulates foreign bond offerings in the U.S.
Historically, the most important foreign bond markets
have been in Zurich, New York, and Tokyo.
Zurich and Tokyo because of low market interest rates; the
U.S. because of its large market.
Foreign bonds are often swapped out for another
Unique Names for Foreign Bonds
Financial markets have Bulldog bonds
come up with unusual Issued in the United
nicknames for foreign Kingdom.
bonds. These include: Kiwi bonds
Yankee bonds Issued in New Zealand.
Issued in the United States. Kangaroo bonds
Matador bonds Issued in Australia.
Issued in Spain. Maple bonds
Rembrandt bonds Issued in Canada.
Issued in the Netherlands. Panda bonds
Samurai bonds Issued in China.
Issued in Japan. Matilda bonds
Issued in Australia.
Eurobonds are bonds issued by a non-resident
and denominated in other than the currency of
the country in which it is being placed.
The bond’s currency of denomination is an offshore
Example: Coca Cola issuing a U.S. dollar denominated
bond in Europe.
They are generally issued and sold simultaneously
in more than one market and thus the advantage of
the Eurobond market is that issuers can raise large
sums of capital from investors all around the world.
Issuers include national governments,
supranational organizations (such as the World
Bank),“AAA” corporations and global banks.
The U.S. dollar has been the dominant currency of
denomination for Eurobonds (although the euro has
grown in important).
Eurobonds: Main Features
Eurobonds are not regulated by the country of the currency in
which they are denominated.
Eurobonds are “bearer bonds”, i.e., they are not registered
anywhere centrally, so whomever holds (or bears) the bond is
considered the owner. Bearer status also enables Eurobonds
to be held anonymously.
The Eurobond market investor market is largely a wholesale
(market with bonds held by large institutions.
Pension funds, insurance companies, mutual funds
Since Eurobonds are denominated in an offshore currency,
investors in euro-bonds assume both credit and foreign
exchange risks (if the currency if denomination is other than
their home currency).
Some publically offered eurobonds trade on stock exchanges,
normally in London or Luxembourg. Others are placed
directly with institutional investors without a listing (private
Comparative Characteristics of
Bonds: Domestic and International
US Market: Domestic and Non-US Market: Domestic Eurobond Market
Foreign Bonds and Foreign Bonds
Regulatory Bodies Securities and Exchange Official agency approval Minimum regulatory
Commission (SEC) control
Disclosure requirements More detailed Variable Determined by market
• High initial expense practices
• High ongoing expense
• Onerous to non-US firms
Issuing costs 0.75-1.00% Variable to 4.0% 2.0-2.5%
Rating requirements Yes Usually no. No, but commonly done
Exchange listing Usually not listed Listing is usual. Listing is usual.
Currency of United States does not Many foreign countries No restrictions on use of
denomination restrict the use of US$ have in past or now restrict US$
restrictions use of their currency
Speed of Issuance Relatively slow until Rule Variable. Usually fast
415 on “shelf registration”
Comparative Advantages and
Disadvantages of Bonds
US Market: Domestic and Non-US Market: Domestic Eurobond Market
Foreign Bonds and Foreign Bonds
Borrower/Issuer (+) Large market, great (+) Local visibility, (+) Lower annual
incentives depth/liquidity producing diversification of funding interest expense, speed
generally favorable terms. sources, hedging of placement
(-) Disclosure is costly to opportunities (-) Cannot sell issue in
foreigners (SOX) (-) Markets may be small, U.S. until seasoned (as
queuing may prevail and determined by SEC).
relatively higher rates
Lender/Investor (+) Great depth and (+) Diversified currency (+) Diversified currency
incentives liquidity, appeal of portfolio portfolio, bearer bonds,
standardized information (-) Reporting to tax no withholding tax on
and reporting authorities and interest payments.
requirements, adequate withholding taxed may (-) Less liquidity and
regulation apply information disclosures
Registration of International Bonds
Foreign bonds must meet the registration and listing
regulations of the country in which they are issued.
Thus, Yankee bonds being offered to potential public buyers
(i.e., public placements) must comply with 1933 Securities Act
requiring full financial disclosure and the offering of a prospectus.
Private placements do NOT have to be registered with the SEC.
See next slide for U.S. requirements
Eurobonds, however, are not required to meet
For example, euro-dollar bond offerings outside of the United
States (“Reg S Bonds”) do not require SEC registration.
Note: Issue of time and expense in bring a foreign bond
to market has resulted in a general preference for
eurobond offerings by global borrowers.
Registering Bonds in the U.S.
All bonds being offered to the investing public in the
United States (with the exception of U.S.
government, federal agency and municipal bonds)
must be registered with the Securities & Exchange
This requirement applies to Yankee bonds as well.
Registration requires that specific information be
disclosed to the public, such as:
financial data about the borrower,
how the money will be spent,
how the borrower intends to repay.
the terms of the bond itself.
This information is included in the bond’s indenture.
Regulation S Bonds
Yankee bonds issued in the United States to the general
public must be registered with the Securities and
However, Regulation S exempts a US dollar bond
offered outside the United States by a non-resident from
having to register.
These bonds cannot be sold to Americans.
Telekom (Malaysian telecommunications; Moody’s A3), $500M,
5.3% yield, offered September 15, 2004. Book runners: Deutsche
Bank and UBS.
Sold to 183 investors representing a mix of pension funds, asset
managers, banking/financial institutions, and private banks; all sales
outside of the United States: 61% in Asia and 39% in Europe.
Types of International Bonds
Types of International Bonds: Straight
Straight Fixed Rate International Bond
Most international bonds are of this type and are
Designated maturity date,
Fixed coupon payments (% of par value),
Eurobond interest is typically paid annually:
Why? Less costly for borrowers to do so.
No options (e.g., convertibility into stock) attached
Entire issue brought to market at one time.
Sometimes referred to as “plain vanilla” bonds!
International Bonds: Equity Related
Equity Related Bonds
(1) either fixed income convertible issues, which:
Allow the holder to exchange the bond for a
predetermined number of share of common stock.
Carry lower interest rates than a straight only bond
because of the conversion option.
(2) or fixed income bonds with equity warrants,
Have a call option (or warrant) feature which allows the
holder to purchase a certain number of equity shares at
a pre-stated price over a predetermined period of time.
International Bond: Zeros
Zero Coupon Bonds have the following
Sold at a discount from face (par) value,
Do not pay any coupon interest payments.
At maturity, holder receives full face (par) value.
Return is represented by the difference between price and
These zero coupon bonds are especially attractive to
Why? Their tax laws treat the return on zero coupon bonds as
a tax free capital gain (where in Japan coupon payments are
International Bonds: Dual Currency
Fixed rate bond that pays interest in one currency, and
Upon maturity, repays the principal in another currency.
Good option for a MNE financing a foreign subsidiary.
Very popular among Japanese firms:
Coupon payments in yen; principal repayment in dollars.
Example of a strategy in using a dual currency bond:
Used by Japanese companies wanting to establish or expand U.S.
Japanese company has a more recognized name in Japan so they
raise money initially in Japan.
Eventually the subsidiary will realize profits in the U.S. and at that
time they will pay the principal on the debt in US$.