BAJAJ BROKING
March 07, 2025
5 mins read
To help you understand what Eurobonds are, you must know that they are in no way tied to Europe or its governments. A Eurobond is a debt instrument that is issued in a different currency than that of the country where it is being sold. To help you with an example, let us consider a bond that is issued in Japan but is sold in U.S. dollars. This kind of bond would be called a Eurobond.
One of the major benefits of issuing Eurobonds is that it provides companies and governments with a flexible way to raise money in a more profitable currency. This, in turn, helps them tap into international investors.
Here, we will be taking a deep dive into understanding what Eurobonds are and how they work.
As previously discussed, Eurobonds are bonds that are issued in a currency that is different from the country’s local currency in which it's being sold. The name ‘Eurobonds’ has nothing to do with Europe. Here, the "euro" means "external", which is an indication that these bonds are issued in a foreign currency.
To know what currency a eurobond is denominated in, one can simply look at how it is named. Here’s an example for you to understand this better. A company can issue a Eurodollar bond, which is denominated in U.S. dollars, in Australia, or an international banking syndicate could issue Eurodirham bonds, that is denominated in UAE dirhams in Thailand.
The main aim of issuing these bonds is to help companies raise funds in international currency and open up the investments to international players.
There is a very simple idea behind issuing a eurobond: companies that want to issue the eurobond pick the country they want to issue it in, considering various factors. These include factors like interest rates, market size and the country’s economic conditions. This helps the company zero in on the most favorable environment for raising capital.
Since most eurobonds have a small notional or par value, they become more affordable for investors and make them a more attractive option to invest in. Another benefit of investing in eurobonds is that they are highly liquid as they can be converted into cash quickly, usually in a single fiscal year.
Eurobonds hold many benefits for both the issuer and the investors. Here’s a look at both these aspects.
The Appeal for Issuers
One of the main benefits the eurobonds hold for companies is that they can pick both the country and currency for issuance. This helps them customize the bond to fit their financial needs.
When companies issue bonds in a country that has profitable interest rates, the borrowing expenses automatically go down.
Since Eurobonds are issued in one country and traded internationally, companies can get a more diverse pool of investors involved.
With the help of Eurobonds, companies can hedge against fluctuations in their home currency since the bonds are issued in varying currencies.
The Appeal for Investors
By investing in Eurobonds, investors can diversify their portfolio while gaining exposure to international markets and investing in established companies.
One of the biggest benefits of Eurobonds for investors is that they are highly liquid as they are usually denominated in strong currencies and issued in financially stable markets, helping investors buy or sell them when needed.
There are five different types of Eurobonds. Here is a look at them.
Fixed-Rate Eurobonds: As the name suggests, these Eurobonds pay a fixed interest rate throughout the bond’s life. This works well for investors who want predictable returns.
Floating-Rate Eurobonds: Think of this as the opposite of fixed-rate bonds since these have variable interest rates that are periodically adjusted.
Zero-Coupon Eurobonds: These eurobonds do not pay regular interest. However, they are issued at a discount and can be redeemed at full value during their maturation.
Dual-Currency Eurobonds: This eurobond provides interest payments in one currency and principal repayment in another. This works great for investors who want to diversify their exposure to different currencies.
Equity-Linked Eurobonds: With these bonds, investors get the option to convert their bonds into shares of the issuing company when certain conditions are fulfilled. This provides the potential of equity participation and capital gains to the investors.
Similar to all securities, Eurobonds also hold certain risks. Here is a look at some of them.
Exchange Rate Risk: Because Eurobonds are issued in foreign currencies, exchange rates could result in price fluctuations. When the currency of the bond weakens against an investor’s home currency, the returns could be affected.
Interest-Rate Risk: Eurobonds having fixed interest rates can be affected when there are interest rate changes. When the rates rise, the bond prices will fall, and if rates fall, the bond prices go up.
Credit Risk: With bonds, the hances of credit risk always exists. If the issuer fails to make interest or principal payments, it could lead to major losses. This is why the issuer’s creditworthiness needs to be considered.
Liquidity Risk: While most eurobonds are liquid, it is not true for all of them. As a result, these positions can be harder to exit without affecting the bond’s price.
Since Eurobonds are primarily traded in international markets, investors must have an account with a broker or financial institution that provides access to these bonds. Some investment platforms and banks offer Eurobond funds as an alternative.
Eurobonds are debt instruments issued in a different currency than that of the country where it is being sold. Investors who are thinking of investing in Eurobonds must do their research. Everything from who’s issuing the bond and whether it is a company or a government should be taken into account. It is also important to remember to take a deep dive into understanding how the funds raised by the bond will be used.
There is no doubt that Eurobonds have their fair share of advantages, but they also have their risks. This is precisely why it is important to make an informed decision when it comes to investing in these debt instruments.
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While eurobonds are issued in a foreign currency and sold outside the issuer's home country, foreign bonds are issued in the local currency and are sold by a foreign issuer.
Yes, they can be suitable for individual investors as they offer many advantages for them.
Eurobonds are issued in bearer form. Thus, investors can avoid regulations and taxes.
Some of the factors that influence a eurobond’s interest rates are the issuer’s creditworthiness, the overall economic conditions, prevailing interest rates, etc.
After their initial issuance, Eurobonds can be traded in the secondary market.
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