1.
The domestic bond market
A domestic bond can be defined as a bond
issued in the currency of the country of issue by a domestic entity. eg. a USD
Treasury bond issued by the US treasury.
2.
The foreign bond market
A foreign bond is a bond issued in the
domestic currency of the country but by a foreign company. E.g. a British
company issuing a dollar bond in the US market.
3.
The Eurobond market
A Eurobond is a bond that is sold by a
government institution or company in a currency that is different from the
country where the bond is issued, E.g. A dollar bond sold in London is a dollar
Eurobond and a sterling bond sold in Germany is called a sterling Eurobond.
Eurobond was first introduced in 1963 and since then the
market has grown enormously particularly in the 1980's. This growth was
stimulated by the fact that corporations found that banks increasingly
reluctant to lend funds due to problems streaming from 3rd world debt.
Moreover, many corporations fund banks increasingly reluctant to lend at a
fixed rate of interest for longer time horizons that they were interested in.
Features of Eurobond
1.
Eurobonds come in a variety of forms and the
most common type are known as straights, which pay fixed rates of interests
with repayment of principal upon maturity. The floating rate notes are also
popular.
2.
The Eurobond market is primarily a medium-term
borrowing market with the vast majority of issues being less than 10 years.
3.
They are free from with holding taxes and it
implies that investors can save on paperwork in trying to avoid double taxation
in their interest income.
Advantages of Eurobonds
1.
Eurobonds would be a decisive step towards a
necessary medium fiscal union and a first step towards a longer-term political
union
2.
They could reduce and even stop the series of
self-fulfilling attacks to fiscally vulnerable member states (EU) and contagion
to other member states with less fiscal vulnerability.
3.
They could eventually bring back financial
stability to the euro area given that joint guarantees or liabilities could
convince markets that its member states are really serious when achieving a
proper fiscal union and a stable euro.
4.
They could reduce the cost of debt of most euro
area member states and eventually of all of them through the much longer size,
depth, liquidity and diversification of such a market which could reach the same
status as the US treasury bond market.
5.
Lower cast of debt and very large attraction to
large government and private investors that need to diversify their investments
beyond Us dollars could help the euro area member states to achieve earlier
sustainable debt levels, faster recovery of economic activity and higher
economic growth potential by returning faster to more normal levels of public
investment.
Disadvantages of EuroBonds
1.
A Eurobond, jointly guaranteed by euro area
member states, contains an implicit insurance for all participating member
states and some of them may have an incentive to issue too much debt to profit
from such an implicit guarantee (when they could only issue too little debt
before the existence of the Eurobond) creating a 'moral hazard' issue and its
consequent rejection by the most fiscally responsible member states.
2.
Some AAA rated member states, such as Germany,
may temporarily have to pay a slightly higher interest rate on its debt, given
the inclusion in the jointly guarantee of other member states with lower
ratings.
3.
The same member states rightly claim that
Eurobonds required as a pre requisite to their issuance to achieve a very high
harmonisation of fiscal politics by all
euroarea member states.
Innovations in the Eurobond market
The first Eurobond issues were in the form of 'straights',
that is borrowing at a fixed interest, but the Eurobond market has since
developed so that many issues now have innovative features. Nowadays, a higher
proportion of Eurobond issues are in the euro currency. Such bonds are
attractive to international investors that wish to diversify away from the USD.
More recently, in some Eurobond issue, the principal to be
returned to the investors is linked to movements in a bond market index such a
the nikkei. The Eurobond market has been opened up to governments from
so-called emerging markets such as Argentina, Mexico, South-Africa and china.
International bond credit rating
Fitch rating, Mody's investor service and standard &
poor's (S & P) have for years provided credit rating on domestic and
international bonds and their issuers. Bond issues are classified into
categories based on the credit worthiness of the borrower. The ratings are
based on an analysis of current information regarding the likelihood of default
and the specifics of the debt obligation. Mody's rates bond issues (and
issuers)into 9 categories from Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C. ratings of
Aaa to Baa are known as investment grade ratings. these issues are judged not
to have any speculative elements, interest payments and principal safety appear
adequate at present. The future prospects of lower-rated issues (Ba to C)
cannot be considered as well assured.
Standard & Poor's (S&P) rates bond issues (and
issuers) into 10 categories: AAA, AA, A, BBB, BB, B, CCC, CC and R, SD and D.
Categories: AAA to BBB are investment grade ratings. An obligor rated R is
under regulatory supervision owing to its financial conditions when due.
International Financial Institutions (IFI) are organisations
that were created by national government from different nations. The world
bank, the international monetary fund (IMF) and African Development Bank
(AFOB), United Nation (UN) are all international institutions.
Some institutions, such as the world bank, provide lending
services to nations around the world and others focus on working with
government and humanitarian organisations within one particular area. These
institutions attempt to foster economic development and improve economic
relations between nations. World Trade Orrganisation (WTO), IMF, UN and the
World Bank will be considered.
No comments:
Post a Comment