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Eurobond All You Need to Know

08 Feb 2024

Introduction

A Eurobond, also known as an external bond, is a fixed-income debt instrument. It allows entities to issue a bond in a currency other than the domestic currency. The prefix Euro doesn't mean the bond is issued in Europe or the euro currency. It rather indicates the currency in which the debt instrument is released. For example, a bond denominated in Japanese yen is referred to as a Euro-Yen bond.

Similarly, a Eurobond denominated in US dollars is a Euro-Dollar bond. The first Eurobond was issued in 1963 by a company that operated Italy’s railroads. It was issued in US dollars to avoid high taxes and ensure the Italian Lira's viability. 

How do Eurobonds work? 

Eurobonds are issued by entities like governments, financial institutions, global syndicates, and private entities that need funds in a foreign currency. The issuer can choose the country depending on its economy and regulatory environment, such as interest rates, market sizes, economic cycles, etc. An investment bank or other financial institution issues a Eurobond on behalf of the borrower. The bank plays the role of the primary paying agent once the bond is issued. It collects the principal and interest from the borrower and allocates them to the investors. An entity can issue a Eurobond in any currency other than the currency native to its home country. Unlike regular bonds, Eurobonds are not regulated by the domestic authorities. 

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Eurobonds are highly liquid assets since they can be easily bought and sold on the stock exchanges. Their small face or par value makes them quite attractive to investors. 

Let’s consider an example to understand how a Eurobond works.

A US company, XYZ, wants to set up a large factory in China. The company will need large amounts of money in Chinese Yuan to do this. However, the company may fail to access credit in China as a new entrant. This is where Eurobonds come into play. The company will issue Euro-Yuan bonds to raise funds for its new factory in China. 

Advantages of Eurobonds 

Now that you are familiar with how Eurobonds work, let’s have a look at the benefits of these debt instruments. 

Benefits of Eurobonds to issuers 

Here’s a list of benefits of Eurobonds you can enjoy as an issuer: 

  • Eurobonds allow you to issue bonds in the chosen currency and country 
  • You can borrow funds at low interest rates 
  • You can trade these bonds internationally with lower forex risks 
  • Eurobonds provide you access to a range of maturity periods 
  • The debt instruments help diversify your funding sources, reducing reliance on domestic investors or banks 

Benefits of Eurobonds to investors 

Eurobonds allow you to enjoy the following benefits as an investor: 

  • They offer the flexibility to invest in high-value currencies 
  • You can get exposure to foreign investments despite staying in the home country by investing in them
  • They are cheaper to obtain due to their small face value 
  • Eurobonds offer diversification, spreading out your investment risks 

Disadvantages of Eurobonds

Eurobonds have a few disadvantages, as explained below:

  • Eurobonds are riskier since they are not regulated domestically
  • They are vulnerable to the economic or political risks of the country where they are issued 
  • Exchange rate fluctuations impact Eurobonds 

Wrapping up

Eurobonds are effective instruments for global financing. They provide unique advantages to both issuers and investors. You can easily raise foreign currency-denominated debt, diversify your funding sources, and attract a large investor base.  Investing in these external bonds can diversify your portfolio and lower the risk involved in a single currency, asset or country. However, investing in Eurobonds is not completely immune from risks. These financial instruments can sometimes be volatile. Thus, it is crucial to research before investing in Eurobonds. 

 

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