A Eurobond is debt instrument that's denominated in a currency other than the home currency of the country or market in which it is issued. Eurobonds are frequently grouped together by the currency in which they are denominated, such as eurodollar or Euro-yen bonds. Since Eurobonds are issued in an external currency, they're often called external bonds. Eurobonds are important because they help organizations raise capital while having the flexibility to issue them in another currency.

Issue of Eurobonds is usually handled by an international syndicate of financial institutions on behalf of the borrower, one of which may underwrite the bond, thus guaranteeing the purchase of the entire issue. A foreign bond may define as an international bond sold by a foreign borrower but denominated in the currency of the country in which it is placed. It underwrites and sells by a national underwriting syndicate in the lending country. Thus, a US company might float a bond issue in the London capital market, underwritten by a British syndicate and denominated in sterling.

The bond issue would sell to investors in the UK capital market, where it would quote and traded. Foreign bonds issued outside the USA call Yankee bonds, while foreign bonds issued in Japan are called Samurai bonds. Canadian entities are the major floaters of foreign bonds in the USA.

Types Of Eurobonds:

There are three types of Eurobonds, of which two are international bonds. A domestic bond is a bond issue in a country by a resident of that country.

There are several different types of Eurobonds:

  • Straight Bond: Bond is one having a specified interest coupon and a specified maturity date. Straight bonds may issue with a floating rate of interest. Such bonds may have their interest rate fixed at six- month intervals of a stated margin over the LIBOR for deposits in the currency of the bond. So, in the case of a Eurodollar bond, the interest rate may base upon LIBOR for Eurodollar deposits.
  • Convertible Eurobond: The Eurobond is a bond having a specified interest coupon and maturity But, it includes an option for the hold to convert its bonds into an equity share of the company at a conversion price set at the time of issue.
  • Medium-term Eurobond: Medium-term Euro notes are shorter-term Eurobonds with maturities ranging from three to eight years. Their issuing procedure is less formal than for large bonds. Interest rates on Euro notes can fix or variable. Medium-term Euro-notes are similar to medium-term roll-over Eurodollar credits. The difference is that in the Eurodollar market lenders hold a claim on a bank and not directly on the borrower.

Characteristics of Euro bonds or Features of Eurobonds

The following characteristics of euro bonds below are:

  1. Straight bonds: the fixed interest rate at periodic intervals, usually annually.
  2. Floating-rate notes (FRNs): rollover pricing payment usually six months interest stated in terms of a spread over some reference rate.
  3. Zero-coupon bonds: discount securities, sold either at a fraction of face value and redeemed at face value, or sold at face value and redeemed at a premium.
  4. Convertible bonds: can exchange for some other type of asset: stock, gold, oil, other bonds.
  5. Mortgage-backed Eurobonds: backed by a pool of mortgages, or other bonds Institutions which would otherwise exclude from Eurobond market can get access.
  6. Dual-currency bonds: purchased in one currency, coupon or principal paid in a second currency.

Features of Eurobonds:

  • The issuing technique takes the form of a placing rather than formal issuing; this avoids national regulations on new issues.
  • Eurobonds place simultaneously in many countries through syndicates of underwriting banks.
  • Unlike foreign bonds, Eurobonds sale in countries other than that of the currency of denomination; thus dollar-denominated Eurobonds sale outside the U.S.A.
  • The interest on Eurobonds is not subject to withholding tax.