The International Capital Market.ppt

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1、,8,The International Capital Market -The Bond Market (Chapter 12),Essential Readings,The Whole Chapter 12,Main Contents,The International Bond MarketThe US Subprime Mortgage Crisis,The International Bond Market,Bond is a long term contract in which the bondholders lend money to a company. In return

2、the company promises to pay the bondholders a series of interest, known as the coupon payments, until the bond matures.,Bond,CharateristicsBond can be regarded as IOU(I owe you) with pages of legal clauses.At maturity the bondholder receives a specified principal sum called the par value or face val

3、ue. This is usually 100 in the UK and $1000 in the USA.The time of maturity is generally between 7 to 30 years.,The Worlds Bond Market,Foreign BondsEurobond,Foreign Bond,Foreign Bond is the bond denominated in the currency of the country where it is issued when the issuer is a non-resident.E.g. A Ge

4、rman company issuing dollar bonds to the US investors.E.g. Yankee, Bulldog, Samurai.,Eurobonds,Eurobonds are bonds sold outside the jurisdiction of the country of the currency in which the bond is denominated.A Dutch borrower issuing Dollar denominated bonds to UK, or Switzerland, or even Netherland

5、s.Most of the Eurobonds are of fixed rate, 25% are floated rate.The currencies denominated most often are USD, GBP, Deutsche Mark and Japanese Yen.,National Security Registrations,Yankee bonds must meet the requirements of the SEC, just like U.S. domestic bonds.Many borrowers find this level of regu

6、lation burdensome and prefer to raise U.S. dollars in the Eurobond market.Eurobonds sold in the primary market in the United States may not be sold to U.S. citizens.Of course, a U.S. citizen could buy a Eurobond on the secondary market.,Withholding Taxes,Prior to 1984, the United States required a 3

7、0 percent withholding tax on interest paid to nonresidents who held U.S. government or U.S. corporate bonds.The repeal of this tax led to a substantial shift in the relative yields on U.S. government and Eurodollar bonds.This lends credence to the notion that market participants react to tax code ch

8、anges.,Security Regulations That Ease Bond Issuance,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 issue

9、s do not have to meet the strict information disclosure requirements of publicly traded issues.,Bearer Bonds and Registered Bonds,Bearer Bonds are bonds with no registered owner.With bearer bonds, possession is the evidence of ownership. Registered Bonds: the owners name is registered with the issue

10、r.With registered bonds, the owners name is on the bond and it is recorded by the issuer.U.S. security laws require Yankee bonds sold to U.S. citizens to be registered.,Global Bonds,A global bond is a very large international bond offering by a single borrower that is simultaneously sold in North Am

11、erica, Europe and Asia.Mostly institutional investors are the purchasers so far.,Types of Instruments,Straight Fixed Rate DebtFloating-Rate NotesEquity-Related BondsZero Coupon BondsDual-Currency Bonds Composite Currency Bonds,Straight Fixed Rate Debt,These are “plain vanilla” bonds with a specified

12、 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 refer

13、ence rates are 3-month and 6-month U.S. dollar LIBORSince 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.,Question,Your firm has just issued five-year floating-rate notes indexed to six-month U.S. dollar Libor plus perc

14、ent. What is the amount of the first coupon payment your firm will pay U.S. $1,000 of the face value, if six-month Libor is currently 7.2%?,Solution,0.5 x (.072 + .0025) x $1,000 = $37.25.,Equity-Related Bonds,ConvertiblesConvertible bonds allow the holder to surrender his bond in exchange for a spe

15、cified number of shares in the firm of the issuer.Bonds with equity warrantsThese bonds allow the holder to keep his bond but still buy a specified number of shares in the firm of the issuer at a specified price.,Convertible Bonds,A convertible bond issue allows the investor to exchange the bond for

16、 a predetermined number of equity shares of the issuer. The floor-value of a convertible bond is its straight fixed-rate bond value. Convertibles usually sell at a premium above the larger of their straight debt value and their conversion value. Investors are usually willing to accept a lower coupon

17、 rate of interest than the comparable straight fixed coupon bond rate because they find the conversion feature attractive.,Bonds with Equity Warrants,These bonds allow the holder to keep the bond but still buy a specified number of shares in the firm of the issuer at a specified price.They can be vi

18、ewed as straight fixed-rate bonds with the addition of a call option (or warrant) feature. The warrant entitles the bondholder to purchase a certain number of equity shares in the issuer at a pre-stated cash price over a predetermined period of time.With a convertible bond, you surrender the bond to

19、 get the shares. With equity warrant bonds you pay cash and keep the bond.,Zero Coupon Bonds,Zeros are sold at a large discount from face value because there is no cash flow until maturity.In the U.S., investors in zeros owe taxes on the “imputed income” represented by the increase in present value

20、each year, while in Japan, the gain is a tax-free capital gain.,Zero Coupon Bonds,Zero coupon bonds are sold at a large discount from face value because there is no cash flow until maturity.In the U.S., investors in zeros owe taxes on the “imputed income” represented by the increase in present value

21、 each year, while in Japan, the gain is a tax-free capital gain.Pricing is very straightforward:,Question,Suppose two kinds of zero-coupon bonds: The DM300,000,000 issue due in 1995 sold at 50 percent of face value, and the DM300,000,000 due in 2000 sold at 33 1/3 percent of face value. Both were is

22、sued in 1985. Calculate the implied yield to maturity of the two.,Answer,1.( DM1,000/500)1/10-1=7.177%2.(DM1,000/333.33)1/15-1=7.599%,Dual-Currency Bonds,A straight fixed-rate bond, with interest paid in one currency, and principal in another currency.Japanese firms have been big issuers with coupon

23、s in yen and principal in dollars.Good option for a MNC financing a foreign subsidiary.,Question,Consider 8.5% Swiss Franc/US Dollar dual-currency bonds that pay $666.67 at maturity per SF1,000 of par value. What is the implicit SF/$ exchange rate at maturity? Will the investor be better off or wors

24、e off at maturity if the actual SF/$ exchange rate is SF1.35/$1.00?,Solution,1. The exchange rate is: SF1000/666, =1.5SF/$2. If the exchange rate at maturity is SF1.35/$1.00, SF1,000 would buy $740.74 = SF1,000/SF1.35. Thus, the dual currency bond investor is worse off with $666.67 because the dolla

25、r is at a depreciated level in comparison to the implicit exchange rate of SF1.50/$1.00.,Composite Currency Bonds,Denominated in a currency basket, like the SDRs or ECUs, instead of a single currency.Often called currency cocktail bonds.Typically straight fixed-rate debt.,Frequency of Payment,Size o

26、f Coupon,Payoff at Maturity,Characteristics of International Bond Market Instruments,Currency Distribution of International Bond Amounts Outstanding,(As of Year-End 2009 in U.S. $Billions),Distribution of International Bond Offerings,(As of Year-End 2009 in U.S. $Billions),Source: Derived from Inter

27、national Banking and Financial Market Developments, Bank for International Settlements, Table 13B, p. A91, June 2007 and June 2009, and p. A109, June 2010; Table 15B, p. A95, June 2007 and June 2009; and p. A113, June 2010.,International Bond Market Credit Ratings,Fitch IBCA, Moodys and Standard & P

28、oors sell credit rating analysis.Focus on default risk, not exchange rate risk.Assessing sovereign debt focuses on political risk and economic risk.,Eurobond Market Structure,Primary MarketA borrower desiring to raise funds by issuing Eurobonds to the investing public will contact an investment bank

29、er and ask it to serve as leader manager of an underwriting syndicate that will bring the bonds to the market.The underwriting syndicate is a group of investment banks, merchant banks, and the merchant banking arms of commercial banks that specialize in some phase of a public issuance.Secondary Mark

30、etOTC market centered in London.Others as Frankfurt and Amsterdam.,The Secondary Market,Bonds which are traded in the secondary market usually have to be priced. The main influences on the price of the a bond will be the general level of interest rates for securities of that risk level and maturity.

31、Valuing bonds is important in the secondary market.,Eurobond Market Structure,Primary marketVery similar to U.S. underwriting.Secondary marketOTC market centered in London. Comprised of market makers as well as brokers.Market makers and brokers are members of the International Capital.Market Associa

32、tion (ICMA), a self-regulatory body based in Zurich.Clearing proceduresEuroclear and Cedel handle most Eurobond trades.,Eurobond Practices: Primary Market,A borrower desiring to raise funds by issuing Eurobonds to the investing public will contact an investment banker and ask it to serve as the lead

33、 manager of an underwriting syndicate that will bring the bonds to market. The underwriting syndicate is a group of investment banks, merchant banks, and the merchant banking arms of commercial banks that specialize in some phase of a public issuance. The lead manager will sometimes invite co-manage

34、rs to form a managing group to help negotiate terms with the borrower, ascertain market conditions, and manage the issuance.,Eurobond Practices: Primary Market,The managing group, along with other banks, will serve as underwriters for the issue. They will commit their own capital to buy the issue fr

35、om the borrower at a discount from the issue price. The discount, or underwriting spread, is typically in the 2 to 2.5 percent range. By comparison, the spread averages about 1 percent for domestic issues. Most of the underwriters, along with other banks, will be part of a selling group that sells t

36、he bonds to the investing public.,Eurobond Practices: Secondary Market,Eurobonds initially purchased in the primary market from a member of the selling group may be resold prior to their maturities to other investors in the secondary market. The secondary market for Eurobonds is an over-the-counter

37、market with principal trading in London. However, important trading is also done in other major European money centers, such as Zurich, Luxembourg, Frankfurt, and Amsterdam.,The secondary market consists of market makers and brokers connected by an array of telecommunications equipment. Market maker

38、s stand ready to buy or sell for their own account by quoting two-way bid and ask prices. Market makers trade directly with one another, through a broker, or with retail customers. The bid-ask spread represents a market makers only profit; no other commission is charged.,Eurobond Practices: Secondar

39、y Market,Valuing Bonds,Based on whether the bond is with fixed redemption date, the bond may be divided into:Redeemable bondIrredeemable bond,Valuing Bonds,A bond is priced according to general market interest rates for the risk class and maturity:Irredeemable: Pd = I Kd Redeemable: Pd = i1 + i2 + i

40、3 + Rn (1+kd) (1+kd)2 (1+Kd)3 (1+kd)n,Exercise,Suppose an irredeemable bond with an annual coupon of 8%, and the face value is $100.1. Whats the bonds value if the market interest rate is 10%?2.Whats the bonds value if the market interest rate is 6%?,Solution,1. =8/0.10=802.=8/0.6=133.33,Exercise,Bl

41、ackby plc issued a bond with a par value of 100 in September 1996, redeemable in September 2002 at par. The coupon is 8% payable annually in September. The facts available from this are:The bond might have a par value of 100 but this may not be what the investors will pay for it.The annual cash paym

42、ent will be 8(8% of par)In Sept.2002, 100 will be handed over to the bondholder.What is the price investors will pay for this bond at the time of issue if the market rate of interest for a security in this risk class is 7%?,Clearing Procedures,Eurobond transactions in the secondary market require a

43、system for transferring ownership and payment from one party to another. Two major clearing systems, Euroclear and Clearstream International, handle most Eurobond trades.Euroclear is based in Brussels and is operated by Euroclear Bank.Clearstream is located in Luxembourg.,Clearing Procedures,Both cl

44、earing systems operate in a similar manner. Each clearing system has a group of depository banks that physically store bond certificates. Members of either system hold cash and bond accounts. When a transaction is conducted, electronic book entries are made that transfer book ownership of the bond c

45、ertificates from the seller to the buyer and transfer funds from the purchasers cash account to the sellers. Physical transfer of the bonds seldom takes place.,Other Functions of the Clearing System,Euroclear and Clearstream perform other functions associated with the efficient operation of the Euro

46、bond market. (1) The clearing systems will finance up to 90 percent of the inventory that a Eurobond market maker has deposited within the system.(2) The clearing systems will assist in the distribution of a new bond issue. The clearing systems will take physical possession of the newly printed bond

47、 certificates in the depository, collect subscription payments from the purchasers, and record ownership of the bonds. (3) The clearing systems will also distribute coupon payments. The borrower pays to the clearing system the coupon interest due on the portion of the issue held in the depository, w

48、hich in turn credits the appropriate amounts to the bond owners cash accounts.,International Bond Market Indices,There are several international bond market indices.J.P. Morgan and CompanyDomestic bond indices. International government bond index for 18 countries.Widely referenced and often used as

49、a benchmark.Appears daily in The Wall Street Journal.,1,The Subprime Mortgage Crisis,The US Subprime Mortgage Crisis,What is the Subprime Mortgage ?The background informationThe subprime mortgage crisisIts Impact to the world economy,What is the Subprime Mortgage loan?,In the US, there are different kinds of products for the housing mortgage loans:Prime mortgageAlt-MortgageSubprime mortgageAccording to different interest rates, these products can be divided into:Fixed Rate MortgageAdjustable Rate Mortgage,