INTERNATIONAL BOND

PRESENTED BY :
SYEDA KHAULA
MURAD
11242

Introduction To
International Bonds
Definition of 'International Bond
Debt investments that are issued in a country by
a non-domestic entity.
The key concept is that the bonds are issued either in a
currency other than the domestic country or by an issuer
that doesnt reside in the country in which bonds are
issued.

International bonds can be government or

corporate bonds.

How It Works
Foreign companies or governments issue bonds that are securitized
and sold to domestic investors in the form of international bonds.
They pay interest at specific intervals, and pay the
principal amount back to the bond's buyer at maturity.
interest are paid in the currency of the issuing country
the value of the bond in the domestic currency will fluctuate
depending on the economic conditions and exchange rates
between the domestic country and foreign country.

A Statistical Perspective:
Domestic International Total
$

47.8%

45.1%

47.5%

18.0%

11.7%

17.2%

DM

7.0%

10.3%

7.4%

Amounts of Domestic and

International Bonds Outstanding

(As of Year-End 2001 in U.S.

$Billions)

Bond Market Groups

i. Domestic bonds. They are issued locally
by a domestic borrower and are usually
denominated in the local currency.
EXAMPLE:
. Amoco Canada issues a bond in Canada
for placement in the Canadian domestic
market, i.e., with investors resident in
Canada

ii.

Foreign bonds. They are issued on a

local market by a foreign borrower and
are usually denominated in the local
currency. Foreign bond issues and
trading are under the supervision of
local market authorities.

Amoco Canada, a foreign corporation,

issues bonds in the U.S. for placement
in the U.S. market alone.

iii. Eurobonds. They are underwritten by a

multinational syndicate of banks and
placed mainly in countries other than the
one in whose currency the bond is
denominated. These bonds are not
traded on a specific national bond
market.
Amoco Canada, a foreign corporation,
issues bonds, in a major international
financial
center,
to
be
placed
internationally.

iv. Global Bonds

A global bond is a very large international bond
offering by
a single borrower that is
simultaneously sold in North America, Europe and
Asia.
Mostly institutional investors are the purchasers
so far.

Euro Market

The Eurobond market is an offshore market where

borrowers and lenders meet because of its lower costs and
lack of regulation.

The Eurobond market is just one segment of the so-called

Euromarket, which also includes Eurocurrency, Euronotes,
Euro commercial paper, and Euroequity markets.

Euromarkets are offshore capital markets, in the sense that

the currency of denomination is not the official currency of
the country where the transaction takes place.

For example, a Malayan firm deposits USD not in the U.S.

but with a bank outside the U.S., for example in Singapore
or in Switzerland. This USD deposit outside the U.S. is called
an Euro deposit.

Eurobond Market
Structure
Primary Market
Very similar to U.S. underwriting.

Secondary Market
OTC market centered in London.
Comprised of market makers as well as brokers.
Market makers and brokers are members of the
International Securities Market Association (ISMA).

Clearing Procedures
Euroclear and Cedel handle most Eurobond
trades.

EURO BOND V/S FOREIGN

BONDS

Eurobonds make up over 80 percent of the

international bond market. The two major reasons is
that the U.S. dollar is the currency most frequently
sought in international bond financing.

Eurodollar bonds can be brought to market more

quickly than foreign bonds because they are not
offered to U.S. investors and thus do not have to meet
the strict SEC registration requirements.
Eurobonds are typically bearer bonds that provide
anonymity to the owner and thus allow a means for
evading taxes on the interest received. Because of this
feature, investors are generally willing to accept a
lower yield on Eurodollar bonds in comparison to

Foreign Bonds and

Eurobonds
Bearer Bonds and Registered Bonds
National Security Registrations
Recent Regulatory Changes

Bearer Bonds and

Registered Bonds
Bearer Bonds are bonds with no registered
owner. As such they offer anonymity but they also
offer the same risk of loss as currency.
Registered Bonds: the
registered with the issuer.

owners

name

is

National Security
Registrations
foriegn bonds must meet the requirements
of the SEC, just like U.S. domestic bonds.

Eurobonds sold in the primary market in the

United States may not be sold to U.S.
citizens.
a U.S. citizen could buy a Eurobond on the
secondary market.

Recent Regulatory
Changes(Laws)
Shelf Registration (SEC Rule 415)
Allows the issuer to preregister a securities
issue, and then offer the securities when the
financing is actually needed.

SEC Rule 144A

Allows qualified institutional investors to trade
private placements.
These issues do not have to meet the strict
information disclosure requirements of publicly
traded issues.

Types of Instruments
1.
2.
3.
4.
5.
6.

Straight Fixed Rate Debt

Floating-Rate Notes
Equity-Related Bonds
Zero Coupon Bonds
Dual-Currency Bonds
Composite Currency Bonds

Straight Fixed Rate Debt

These are plain bonds with a specified
coupon rate and maturity and no options
attached.
Since most Eurobonds are bearer bonds,
coupon dates tend to be annual rather than
semi-annual.
The vast majority of new international bond
offerings are straight fixed-rate issues.

Floating-Rate Notes
Just like an adjustable rate mortgage.
Common reference rates are
month and 6-month U.S. dollar

3-

Since FRN reset every 6 or 12

months, the premium or discount is
usually quite smallas long as there
is no change in the default risk.

Equity-Related Bonds
Convertibles
Convertible bonds allow the holder to surrender his bond in
exchange for a specified number of shares in the firm of the
issuer. Convertible bonds are usually launched in conditions of
poor fixed-rate bond markets, high interest rates and an
expectation of falling rates.
Issuers benefit from:
(1)the lower funding costs relative to short-term money markets and
(2)the possibility of no repaying the principal if the conversion right
is exercised. Investors benefit because they receive the benefit of
regular coupon payments plus the option of locking in to a better
yield later.

Zero Coupon Bonds

Zeros are sold at a large discount
from face value because there is no
cash flow until maturity.
E.g. sukook bond in Pakistan

PAR
PV
T
(1 r )

Dual-Currency Bonds
A straight fixed-rate bond, with interest paid in one
currency, and principal in another currency.

A foreign investor can benefit from purchasing this

bond in any one of three situations:
(1) A drop in the market interest rate on CHF bonds
(2) A rise in the price of the company's stock
(because the bonds are convertible into stocks).
(3) A rise in the JPY relative to the CHF (because the
bond is convertible into a asset).

Composite Currency
Bonds
The currency composite is a portfolio
of currencies: when some currencies
are depreciating others may be
appreciating, thus yielding lower
variability overall.
Typically straight fixed rate debt.

Characteristics of International
Bond Market Instruments
Instrumen
t
Straight FixedRate
Floating Rate
Note
Convertible
Bond

Frequency
of
Payment

Size of
Coupon

Annual

Fixed

Every 3 or 6
months
Annual

Variable
Fixed

Straight fixed
rate with
equity
warrants
Zero

Annual

Fixed

none

zero

Dual Currency
Bond

Annual

Fixed

Payoff at
Maturity
Currency of
issue
Currency of issue
Currency of
issue
or conversion to
equity
shares.
Currency
of
issue
plus conversion
to
equity shares.
Currency
of
issue
Dual currency

Why Investing In International Bond Funds? (Adv)

1. Transparency--Which Bonds

International bond funds can provide you with

transparency that other types of funds do not. This
means that you will be able to see exactly which bonds
you are investing in when you put money into the fund.
2. Cost Efficiency
Another advantage of going with an international bond
fund is that it is going to be more cost efficient than a
traditional bond fund. You will have fewer expenses,
and more of your money will go towards purchasing
bonds.

 3. Easy Purchase and Sale

If you invest in an international bond ,you should be
able to buy or sell shares of them anytime that the
exchange is open.
4. Transparency--Share Prices
Since you will be able to buy at anytime, you are
going to know exactly what the share price is.
Transparent share prices allow you to know exactly
what you are getting into
5. Diversified portfolio:
one of the another reason people should buy
international bind to increase their portfolio.

Dis-advantages Of Investing In
International Bond Funds

1. Costs
One of the biggest disadvantages of international bond funds is
that the costs cut into the potential returns from investment.
Cost covers administration expenses and the salaries of the fund
managers.
There are other fees that you will have to pay such as fees and
sales charges.
By the time you are done paying all of the different fees, it is
going to significantly reduce the amount of money that you can
make from this investment.
2. Limited Knowledge of Returns
you are not going to have much information about how the fund
is performing.
With international bond funds, you are not going to know how
much of a return is made until the end of the accounting quarter
for the fund.
This means that you are going to be able to find out how you are

3. Lack of Control
Investors do not have any control over where their
money is going. They do not get to have any say in the
selection of the bonds in the fund.
Many investors like to have some kind of control over
the investments that they put their money in.
However, with this type of investment, you are not
going to have the choice.
4. Timing
With international bond funds, the bonds are going to
mature at different points.
Because of this, you could run into timing issues that
affect the amount of money that you get back when you
cash out.
You may not get the full amount of money that you have
invested because of the maturity times of the bonds in
the fund.

5. Risk

they are riskier than domestic bond funds.

Many of these funds invest in areas that are not quite developed,
and this increases the amount of risk for the bond fund.
Many people feel safer when they are investing money into their
own economy instead of in the economy of an unstable country.
6. Unknown Buy and Sell Prices
With international bond funds, you are potentially going to have
some problems with the fact that you do not know the buy and
sell prices of the shares when you initiate the transaction.
With mutual funds, you are going to put in an order to buy shares
or sell your own shares, and the price will then be calculated at
the end of the trading day.
This uncertainty can significantly cut into your returns and cost
you money that you were not counting on.

THE PROCESS OF BRINGING A NEW

INTERNATIONAL BOND ISSUE TO MARKET
1. A borrower desiring to raise funds by issuing bonds to the
investing public.
2. They will contact an investment banker and ask it to serve as lead
manager of an underwriting syndicate that will bring the bonds to
market.
3. The lead manager will invite other banks to form a managing
group to negotiate terms with the borrower, market conditions,
and manage the issuance.
4. Then managing group, along with other banks, will serve as
underwriters for the issue, i.e., they will commit their own capital
to buy the issue from the borrower at a discount from the issue
price.
5. Most of the underwriters, along with other banks, will be part of a
selling group that sells the bonds to the investing public.
6. The various members of the underwriting syndicate receive a
portion of the spread (2 to 2.5% of the issue size), depending upon
the number and type of functions they perform.
7. The lead manager receives the full spread, and a bank serving as

PAKISTANS
INTERNATIONAL BOND
Pakistan offers one international bond that is sukuk bond
SUKUK BOND:
Sukuk in general may be understood as a shariah compliant Bond

DIFFERENCE
The Different Between Sukuk And Conventional Bond are the
absent of interest element and the existence of an underlying
permissible transaction. There is no annual coupon rate
attached to the sukuk and thus its characteristic is of zero coupon
bonds.
sukuk holders are entitled to share in the revenues generated by
the sukuk assets as well as being entitled to share in the proceeds
of the realization of the sukuk assets.
the certificate represents a debt to the holder, the certificate will
not be tradable on the secondary market and instead is held until
maturity or sold at par.

DIS-ADVANTAGE &ADVANTAGES
OF SUKUK
Benefits and Features
Tradable shariah-compliant
capital market product providing medium to long-term fixed or
variable rates of return.
Assessed and rated by international rating agencies, which
investors use to assess risk/return parameters of a sukuk issue.
Regular periodic income streams during the investment period
with easy and efficient settlement and a possibility of capital
appreciation of the sukuk.
Liquid instruments, tradable in secondary market .

Disadvantage
the lack of standardization

TYPES OF SUKUK
Sukuk can be of many types depending upon the type of
Islamic modes of financing and trades used in its structuring.
following are more common:

1. Mudaraba Sukuk
2. Musharaka Sukuk
3. Ijara Sukuk
4. Murabaha Sukuk
5. Salam Sukuk
6. Istisna Sukuk
7.Hybrid Sukuk

Sukuk in Pakistan
o

Use of Sukuk to meet govts borrowing requirements

In case of Pakistan Railways, government should develop a
long-term Sukuk programmes to raise $20-50 billion over a
period of 10 years to modernize and expand railway
infrastructure.
Pakistan's Meezan Bank plans to arrange the country's first
airtime-based sukuk (Islamic bond), a format favoured by
telecommunications operators wishing to tap liquidity in the
Islamic capitalmarkets
Diaspora Sukuk Bonds for Pakistani Expatriates: Given
the current political stability in Pakistan, along with the business
friendly policies issued by the Finance Ministry, issuance of
Diaspora Sukuk bonds would not only boost inflow of foreign
capital, but would help in financing new projects for the
development of Pakistans economy.

o Jinnah International Airport Karachi :As the budget

deficit soared to a record high at Rs1.77 trillion in the last
fiscal year, the government raised Rs182 billion through an
Islamic bond, called Sukuk, against the security of Jinnah
International Airport Karachi another asset mortgaged
after Pakistan Motorways (M2).
o The State Bank of Pakistan has adopted a global standard
for sukuk (Islamic bonds), which could help Pakistani issues
attract investment by foreign institutions from the Gulf and
elsewhere.

REFERENCES
http://www.finweb.com/investing/6-d
isadvantages-of-international-bondfunds.html#axzz2fbvNFgFd
http://www.finweb.com/investing/4-di
sadvantages-of-investing-in-internat
ional-bond-funds.html#ixzz2fdGxjNzs
http://mybankersonline.com/diasporasukuk-bonds-for-pakistani-expatriate
s/
http://news.data-sync.biz/tag/pakist
an-investment-bonds/

 http://ifresource.com/2010/04/27/how
-sukuk-works-introduction-structurin
g-and-application-of-sukuk-bonds/
http://investinginbonds.eu/Pages/L
earnAboutBonds.aspx?id=6368