Presentation On

International Bond Market

Presented By..........

(26FIN A2) Md. Ariful Islam Chowdhury - B081721 Md. Hasibur Rahman - B081718 Md. Nuhas Hossain - B081720 Md. Sajedur Rahman - B081707 Abdullahil Kafi - B081705

Introduction

The 1980s were a period of very rapid expansion for the international bond market. It now constitutes a major avenue for cross-border capital flows, and accounts for some 11% of the total nominal outstandings in the global bond markets.

This paper is intended to provide an overview of the international bond market. The main theme running through the account is the relationship between the international and domestic bond markets, which has both a competitive and a complementary aspect. In the first section the market is examined in its historical context, with particular emphasis on the Euro-bond market, which now accounts for three-quarters of all international bonds. The differences between Euro-bonds, foreign bonds and domestic bonds are described and the reasons for the use of international bonds are reviewed.

The second section of the paper deals with the way in which the Euro-bond market is organised, and looks at the trading conventions employed, the importance of bearer status and the absence of withholding tax, and the functioning of the primary and secondary markets. In the third section borrower and investor behaviour in the market are described, together with some important technical innovations which have influenced the market's development. The prospects for the international bond market in the 1990s are discussed in the concluding part of the paper. It is suggested that the potential for a further diversion of business from the domestic to the international market exists mainly in Europe and in particular in the growth of a large ecu bond market.

Changing Nature of the Global Bond Market

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 of U.S. company bond financing is taking place in the European bond markets.

Nature of Bond

A written and signed promise to pay a certain sum of money on a certain date, or on fulfillment of a specified condition. All documented contracts and loan agreements are bonds.

Bond market

The bond market (also known as the credit, or fixed income market) is a financial market where participants can issue new debt, known as the Primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion, of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to BIS (or alternatively $35.2 trillion as of Q2 2011 according to SIFMA)

Worlds Bond Market

The world’s bond market can be divided into two broad groups:

Domestic bond market International bond market.

Domestic Bond Market

The domestic bond market is comprised of all securities issued in each country by “domestic” government entities and corporate. – In this case, issuers are domiciled (i.e.,

headquartered) in the country where those bonds are traded.

International bond market

The international bond market is comprised of non-residents borrowing in another country’s bond markets

The international bond market consists of two groups:

Foreign Bonds and Eurobonds

U. S. bond market size

According to the Securities Industry and Financial Markets Association (SIFMA) as of Q2 2011, the U. S. bond market size is (in trillions of dollars)

Government 9.2 Municipal 2.9Agency 2.4Corporate 7.7Mortgage related

8.3

Asset Backed 1.9

Total32.3

Instrument

Straight Fixed-Rate

Floating Rate Note

Convertible Bond Annual Fixed Currency of issue or conversion to equity shares.

Straight fixed rate with equity warrants

Annual Fixed Currency of issue plus conversion to equity shares.

Zero none zero Currency of issue

Dual Currency Bond

Annual Fixed Dual currency

Frequency of Payment

Annual

Size of Coupon Payoff at Maturity

International Bond Market Instruments

Currency of issueFixed

Every 3 or 6 months Variable Currency of issue

Bearer Bonds and Registered Bonds

Bearer Bonds are bonds with no registered owner. As such they offer anonymity but they also offer the same risk of loss as currency.

Registered Bonds: the owners name is registered with the issuer.

U.S. security laws require Yankee bonds sold to U.S. citizens to be registered.

Foreign Bond

Foreign Bond: - Issued by a foreign borrower to investors in another

country and denominated in the currency of that country. Yankee, Samurai, Bulldog bonds.

Investors view it as a debt instrument issued by a foreign instead of a domestic borrower.

Ford issues offers a bond denominated in SFs to Swiss investors.

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 currency

History of the Foreign Bond Market

100 years ago, the international bond markets consisted solely of foreign bonds, that is, bonds issued, placed, and traded in a bond market which was foreign to the issuer's country of incorporation.

Issuers were typically foreign governments or private sector utilities such as railway companies.

After WW I, the world saw a strong U.S. economy and a strong U.S. dollar. During this period, world capital markets served primarily to channel European savings into the U.S. economy.

Issuance activity elsewhere in the international markets remained small. This dominance of the U.S. foreign bond market became even stronger after

WW II. For years the U.S. foreign bond market was the largest and most important foreign bond market.

In recent years, however, it has been surpassed by the Swiss franc (CHF) foreign bond market.

m

Impact of Exchange Rate Changes on Foreign Bond Returns (For U.S. Investors)

Eurobonds

- Denominated in a specific currency, but sold to investors in a national capital market other than the country of the denominated currency.

Swiss borrower issues $-denominated bonds to investors in UK, India,and Japan

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 referred to as an offshore currency.

– 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 is the dominant currency of denomination for Eurobonds.

History of the EuroBond Market

The first Eurobond (which was also a U.S. dollar denominated bond) was the July 1963 issue by the Italian Autostrade (Italian National Highway Authority), led by SG Warburg & Co and issued in London.

– $15 million; 5.5% coupon; 15 year bonds; listed on the London and Luxembourg stock exchanges.

By 1972, the market had grown to $5 billion; $42 billion by 1982 and $371 billion by 1995.

In the early 1960s, the Eurobond market was mainly a Eurodollar bond market.

Today, the Eurobond market comprises bonds denominated in all the major currencies and several minor currencies.

– For example, in 1996, the Eurobond market included issues denominated in the Egyptian pound, Polish zloty and Croatian kuna.

EuroBond Market by Currency, Early Years (% of Total Volume)

The Main Features of a Eurobond

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 is largely a wholesale (i.e., institutional market) with bonds held by large institutions.

– Pension funds, insurance companies, mutual funds Since they 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 placement).

Types of Eurobonds

Conventional or Straight Eurobonds have a fixed coupon (usually paid on an annual basis) and maturity date when all the principal is repaid.

Floating rate bond notes (FRN) are usually short to medium term bond issues, with a coupon interest rate that “floats,” i.e. goes up or down in relation to a benchmark rate plus some additional “spread” of basis points (each basis point being one hundredth of one percent). The reference benchmark rate is usually LIBOR (London interbank offered rate) or EURIBOR (Euro interbank offered rate). The “spread” added to that reference rate is a function of the credit quality of the issuer.

Zero-coupon bonds do not have interest payments.

Convertible bonds can be exchanged for another instrument, usually an ordinary share or shares (fixed ahead of time with a predetermined price) of the issuing organization. The coupon payable is usually lower than it otherwise would be. Because convertible bonds can be viewed more as equity shares than bonds, the credit and interest rate risks for investors are higher than with conventional bonds.

High-yield bonds are also part of the Eurobond markets, a class of bonds (rather than a type of bond) which individual investors may encounter. High-yield bonds are those that are rated to be “below investment grade” by credit rating agencies (i.e. issuer has a credit rating below BBB).

Relative Growth of Foreign Bonds and Euro Bonds, Early Years

Relative Growth of Foreign Bonds and Euro Bonds, Later Years

Domestic Versus International Bond Market by Country; % of GDP, 2011

International Bond Market Credit Ratings

Fitch IBCA, Moody’s , Standard & Poor’s and DBRS sell credit rating analysis.

Focus on default risk, not exchange rate risk. Assessing sovereign government debt

focuses on political risk and economic risk. Economic risk: external debt, BOP flexibility,

economic structure & growth, management of the economy, and economic prospects

Euro-Bond Market Versus U.S. Bond Markets

Eurobonds: 1964 - 1969 Eurobonds; 1995 - 2006