international bond market - Bahan Kuliah

CHAPTER 7

“International Bond Market”

QUESTION!!!

1. Describe the differences between foreign bonds and Eurobonds. Also discuss why Eurobonds make up the lion’s share of the international bond market.

2. Briefly define each of the major types of international bond market instruments, noting their distinguishing characteristics.

3. Why do most international bonds have high Moody’s or Standard & Poor’s credit ratings?

4. What factors does Standard & Poor’s analyze in determining the credit rating it assigns a sovereign government?

5. Discuss the process of bringing a new international bond issue to market.

6. You are an investment banker advising a Eurobank about a new international bond offering it is considering. The proceeds are to be used to fund Eurodollar loans to bank clients. What type of bond instrument would you recommend that the bank consider issuing? Why?

7. What should a borrower consider before issuing dual-currency bonds? What should an investor consider before investing in dual-currency bonds?

ANSWER!!!

1. Foreign bond issue is one offered by a foreign borrower to the investors in a national capital market and denominated in that nation’s currency. Eurobond issue is one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. Eurobonds make up the lion’s share of the international bond market because the markets for foreign bonds and Eurobonds operate in parallel with the domestic national bond markets, and all three market groups compete with one another.
2. The major types of international bond market instruments:

v  Straight fixed-rate bond issues have a designated maturity date at which the principal of the bond issue is promised to be repaid.

v  Euro-Medium-Term Notes (Euro MTNs) are (typically) fixed-rate notes issued by a corporation with maturities ranging from less than a year to about 10 years.

v  Floating-rate notes (FRNs) are typically medium-term bonds with coupon payments indexed to some reference rate.

v  Equity -related bonds: convertible bonds and bonds with equity warrants. A convertible bond issue allows the investor to exchange the bond for a predetermined number of equity shares of the issuer. The floor-value of a convertible bond is its straight fixed-rate bond value. Convertibles usually sell at a premium above the larger of their straight debt value and their conversion value. Additionally, investors are usually willing to accept a lower coupon rate of interest than the comparable straight fixed coupon bond rate because they find the conversion feature attractive. Bonds with equity warrants can be viewed as straight fixed-rate bonds with the addition of a call option (or warrant) feature.

v  Zero-coupon bonds are sold at a discount from face value and do not pay any coupon interest over their life.

v  A dual-currency bond is a straight fixed-rate bond issued in one currency, say, Swiss francs, that pays coupon interest in that same currency.

3. International bonds have high Moody’s or Standard & Poor’s credit ratings Because International bonds that issuers receiving low credit ratings involve their publication rights.
4. Factors does Standard & Poor’s analyze in determining the credit rating it assigns a sovereign government is assessing economic risk include the sovereigns external financial position, balance of payment flexibility, economic structure and growth, management of the economy and economic prospects.
5. Process of bringing a new international bond issue to market is The J.P. Morgan Domestic and Global Government Bond Indices are widely referenced and used frequently as benchmarks of international bond market performance. The index values for six of the Domestic Government Indices, European Monetary Union Government Bond Index (EMU), the 18-country Global Government Bond Index, and an Emerging Market Government Bond Index (EMBI) appear daily in The Wall Street Journal. Exhibit 7.10 provides an example of these indexes. Note that the index values are provided in local currency terms and in U.S. dollar terms. Additionally, 1-day, 1-month and 3-month total rates of return are provided for each index in local and U.S. dollar terms.
6. Type of bond instrument would you recommend that the bank consider issuing is Straight fixed-rate bond because The reason is that the Eurobonds are usually bearer bonds, and annual coupon redemption is more convenient for the bondholders and less costly for the bond issuer because the bondholders are scattered geographically.
7. The borrower consider before issuing dual-currency bonds is repaid in another currency say U.S. dollars. The amount of the dollar principal repayment at maturity is set at inception, frequently the amount allows for some appreciation in the exchange rate. investor consider before investing in dual-currency bonds is A long term forward contract  the dollar appreciates over of the bonds repayment.