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Outline
Types of bonds Comparative bond characteristics The Gray Market Onshore-Offshore arbitrage
Classification
Foreign Bonds Global bonds
Eurobonds
Foreign Bonds
Issued by a foreign entity and denominated in domestic currency
Global bonds
Sold simultaneously on several markets in the currency of each market
Global bonds
First offered by the World Bank, OntarioHydro, and Hydro-Quebec.
Eurobonds
Issued by a foreign entity and sold in a foreign currency, other than the currency of the country in which the issuer is located.
Eurobonds: Exemplification
A bond issued by Rhone-Poulenc and sold in the US in Swiss francs.
Eurobonds
INSTRUMENT Straight fixed-rate Floating rate note Convertible bond INTEREST FREQUENCY annual annual or quarterly annual COUPON TYPE Fixed Variable Fixed Fixed Zero Fixed Fixed CURRENCY PAYOFF Currency of issue Currency of issue Currency of issue or convertible Currency of issue plus shares Currency of issue Dual Currency Composite currency
Straight fixed-rate with annual equity warrants Zero-coupon bond Dual-currency bond Composite currency bond none annual annual
r($) 5%
r(pounds ) 7%
d 1.2%
The pound is expected to appreciate by an average of 1.2% per year; hence, at maturity, Coca-Cola will have to make payments in a more expensive pound.
Eurobond underwriting
In general, similar to regular bond underwriting
Differences: Lead manager separate from selling group Variable price re-offering
Eurobonds yields are lower, but issuance costs are higher than in North-America.
Onshore-Offshore Arbitrage
Onshore-Offshore Arbitrage
Issuers have an incentive to engage in arbitrage by:
issuing securities offshore and covering their liability with a purchase of risk-free government securities whose cash inflow match the cash outflow of the Eurobonds.
If the matching is perfect, and the government securities can be pledged to pay off the Eurobond liability, the transaction qualifies as a pure arbitrage.