Debt Instruments – What are Eurobonds?
What are Eurobonds?
Eurobonds are (strictly speaking) corporate bonds issued outside the issuer’s home country (e.g. US company issues US bonds in Luxembourg) trading outside the jurisdiction of any particular country.
Eurobonds are international bonds issued in a currency other than the currency of the country or market where the bond is being issued. They are usually issued by companies or sovereigns in a major currency such as the US dollar or euro, and are marketed to investors globally. They are called Eurobonds because they were initially introduced in Europe.
In practice, most sterling bonds issued in London by UK issuers are Eurobonds since domestic sterling bonds are registered and most issuers and investors prefer bearer bonds. They are publicly traded debt instruments with a standard format listed on a recognised exchange, usually London or Luxembourg. Eurodollar bonds make-up the largest segment of the Eurobond market but the Euro/euro bond market is growing fast.
How do Eurobonds reflect in financial statements?
In financial statements, Eurobonds are typically reflected as a long-term liability. The issuance of the bonds is recorded as a liability on the balance sheet, and the periodic interest payments to bondholders are recorded as an expense on the income statement. The principal amount of the bond is then reduced over time as the bond matures and is redeemed.
The fair value of the Eurobonds may be subject to fluctuations, which may impact the financial statements. Changes in the fair value of the bonds may result in gains or losses that are recognized in the income statement.
Benefits of Eurobonds
- Diversification: Eurobonds allow investors to diversify their portfolios by investing in bonds issued in different countries and currencies.
- Liquidity: Eurobonds are traded on global capital markets, making them highly liquid and easily tradable.
- Access to global capital: Eurobonds allow issuers to access a wider pool of global capital, including institutional and retail investors.
- Lower cost of capital: Eurobonds are often issued in major currencies, such as the US dollar or euro, which may result in a lower cost of capital for the issuer compared to issuing bonds in their domestic currency.
Risks of Eurobonds
- Currency risk: Eurobonds are issued in a currency other than the issuer’s domestic currency, which means that changes in exchange rates can impact the value of the bond and the returns received by investors.
- Interest rate risk: Changes in global interest rates can impact the value of the bond and the returns received by investors.
- Credit risk: Eurobonds are subject to credit risk, which is the risk that the issuer may default on its debt obligations.
- Political risk: Political events in the issuer’s country can impact the value of the bond and the returns received by investors.