Eurobonds are international bonds denominated in a currency different from that of the country in which they were issued. For example, Eurodollars are denominated in U.S. dollars and Euroyen are issued in Japanese yen regardless of the initial issuer’s currency. Eurobonds are transferable securities, and the Eurobond market is a significant factor in international finance; the size of the international Eurobond market exceeds that of the U.S. bond market.

History of Eurobonds

The first Eurobonds were traded in 1963 and were originally issued by Autostrade, an Italian motorway construction company, in conjunction with SG Warburg and Co; Autostrade issued $15 million in Eurobonds through the London banking institution. After a slow start, the Eurobond market has grown to become a major force in the international securities markets, in part due to their tax-free status and ease of trading. The name Eurobonds can be confusing to the novice investor; it has nothing to do with Euros, but instead refers to the original securities markets where these bonds were sold.

Eurobond market definition

The Eurobond market is a truly international securities exchange, and as such, there is no one single Eurobond market definition. Essentially, the term Eurobond market can encompass any securities exchange that trades in Eurobonds; since Eurobonds are bought and sold internationally, the Eurobond market is equally international. Eurobonds are available in the denominated currencies of a number of different countries. Initially, Eurobonds were issued in paper format; today, however, most Eurobonds are sold, held, and recorded electronically. Clearinghouse companies in various countries oversee the buying and selling of Eurobonds and pay out funds upon maturity. Eurobond rates are tied to central-bank rates as well as monetary exchange rates; for this reason, Eurobond rates can vary widely from one security to another.

Eurobond Tax advantages

Eurobonds are not subject to taxes, making them a popular choice with investors. However, there is little regulation or oversight for Eurobond transactions and these securities can carry significant risks for inexperienced traders. Variations in governmental regulations regarding securities and fluctuations in the monetary rate can create a great deal of volatility and potential for losses. In order to succeed in the Eurobond market, it’s essential for investors to do research not only on the financial aspects of the bonds, but also the political conditions in the issuing countries and the possibility of catastrophic price shifts and revisions of monetary policies and exchange rates. For investors who are willing to assume the risks involved in Eurobond trading, however, the rewards can be substantial.
Tim Ord
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