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.
