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What is a Eurobond?
A Eurobond is a contract for debt that records the obligations of a borrower to pay the principal amount due plus a given interest rate on a specific set of dates. It is underwritten by international investment firms and banks from several countries in Europe and is issued in a currency other than that of the country where it is issued. It is an instrument of trade that is intended to be purchased and sold through public offering on the stock exchange during the period leading up to maturity. The bonds are popular because they are tax free and virtually free of regulation by any government.
The Eurobond originated in 1963 with the Italian Autostrade network. Eurobonds are traded in several stock exchanges. London and Luxembourg trade in these bonds the most frequently. Tokyo, Singapore, the United States and many other nations trade Eurobonds by issuing them in the denomination of their currency. Eurodollars, for example, would denote Eurobonds based on the U.S. Dollar, and Euroyen would denote bonds issued to be paid in Japanese currency.
This fluidity and flexibility offers an attractive financing tool by giving issuers choice of where to offer the bonds. Issuers can take into consideration the regulations and restraints on trade instruments of each country before making a choice. Investors are attracted to this market for the high liquidity and low par value. These features have helped the Eurobond market grow immensely. The Eurobond market is larger than the U.S. bond market.
Detractors of the Eurobond market point out risk factors inherent to the instrument. Purchasing Eurobonds is risky because of investors' lack of familiarity with conditions in foreign countries. Currency exchange is often a very volatile situation. Drastic price changes and higher sensitivity to the political climate of the world makes the Eurobond less attractive to many. Currency exchange rates can dip to the point that investors lose money with Eurobonds and other foreign bond markets.
There are relatively few records kept on Eurobonds issued — and fewer regulations. Most Eurobonds are purchased in electronic form as opposed to paper tickets with detachable coupons. One of a select few companies acting as a clearing system for the bonds can hold and trade them within the system. Upon maturity, funds are paid electronically via this clearing system to the owner of the Eurobond. Although this does help ensure better record keeping, there is not central regulation of the Eurobond market.
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![Eurobonds are frequently traded on stock markets in Luxembourg.]()
By: Hugh O'NeillEurobonds are frequently traded on stock markets in Luxembourg.
Discussion Comments
One of my friends has a 1.6 million euro bond issue dated 2004 in the Bank of Intesa SPA Italy. He wants to transfer this amount to Dubai. How can he transfer it? Also, can this bond be transferred to other names also?
I've never been able to clearly understand exactly how all this kind of thing, like government bonds and eurobonds and so forth works.
But, I don't think it's a bad thing to put a bit of money into it. I just wouldn't put anything in I wasn't prepared to lose.
Personally I think the best thing to do is put a bit of money into an ethical stock portfolio run by a group. I'm not sure, though, whether they would involve themselves with eurobonds, as, from this, they seem a bit unstable and possibly unethical? Unfortunately, when there is less regulation, people tend to try and take advantage.
@bythewell - I heard that they did a study a while ago where they checked up whether people who were "playing" the stock market, particularly as it relates to exchange rates and bond yields, were doing better on average than a randomized computer program.
Pretty much most of them were about on a par with a random program. It seems like it's got more in common with poker than with any kind of accounting. You have to know how to place bets and read the people around you, but the game itself is very random.
So I wouldn't worry about not being "brave enough" to go into this business. I feel like even the people who are in it don't really know what they're doing.
I can see the appeal of this kind of bond, but at the same time I think I would be far too nervous to invest in them myself.
The bond rates seem to be highly dependent on the exchange rates between countries and ever since I started paying attention to exchange rates I've become more and more aware how volatile they are.
Maybe someone who had a good grasp of them could do well here. Or maybe not. I'm not sure how easy it would ever be to predict exchange rates. There are just so very many factors to take into account.
And even the most stable of countries still seems like it could be vulnerable to a crash at any moment.
I guess I'm just not cut out for bonds!
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