InternationalBondMarketChapterTwelveCopyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ChapterOutlineTheWorld’sBondMarkets:AStatisticalPerspectiveForeignBondsandEurobondsTypesofInstrumentsCurrencyDistribution,Nationality,andypeofIssuerInternationalBondMarketCreditRatingsEurobondMarketStructure&PracticesInternationalBondMarketIndices12-2Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.TheWorld’sBondMarkets:AStatisticalPerspectiveExhibit12.1,below,presentsanoverviewoftheworld’sbondmarketsDomesticbondsareissuedbyaborrowerdomiciledwithinacountry,denominatedinthecurrencyofthatcountry,andtradedwithinthecountry.InternationalbondsincludeforeignbondsandEurobondsAttheendofJune2018,thefacevalueofbonds(long-termoriginalmaturitynotes)outstandingintheworldwasapproximately$114,449.9billion

12-3Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ForeignBondsandEurobondsInternationalbondmarketencompassestwobasicmarketsegments:foreignbondsandEurobondsAforeignbondisofferedbyaforeignborrowertoinvestorsinanationalcapitalmarketanddenominatedinthatnation’scurrencyExample:GermanMNCissuingdollar-denominatedbondstoU.S.investorsAEurobondissueisdenominatedinaparticularcurrencybutsoldtoinvestorsinnationalcapitalmarketsotherthanthecountrythatissuedthedenominatingcurrencyExample:Dutchborrowerissuingdollar-denominatedbondstoinvestorsintheU.K.,Switzerland,andtheNetherlands12-4Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.BearerBondsandRegisteredBondsEurobondsareusuallybearerbonds,bondsinwhichownershipisdemonstratedthroughpossessionofthebondIssuerdoesnotkeepanyrecordsindicatingwhoisthecurrentownerofthebondBearerbondsareveryattractivetoinvestorsdesiringprivacyandanonymity,onereasonforthisbeingthattheyenabletaxevasionRegisteredbonds,ontheotherhand,arebondswhoseownershipisdemonstratedbyassociatingthebuyer’snamewiththebondintheissuer’srecords12-5Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.NationalSecurityRegulationsForeignbondsmustmeetthesecurityregulationsofthecountryinwhichtheyareissuedAssuch,YankeebondsmustmeetthesameregulationsasU.S.domesticbondsManyforeignborrowersfindthislevelofregulationburdensomeandprefertoraiseU.S.dollarsintheEurobondmarketTransactionalrestrictionsprohibitoffersandsalesofEurobondsintheU.S.ortoU.S.investorsduringa40-dayrestrictionperiodthatallowsforthesecuritytobecomeseasonedinthesecondarymarket12-6Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.SecurityRegulationsThatEaseBondIssuanceRule415,institutedbytheSECin1982,allowsforshelfregistrationShelfregistrationallowsanissuertopreregisterasecuritiesissue,andthenshelvethesecuritiesforlatersalewhenfinancingisactuallyneededRule144A,institutedbytheSECin1990,allowsqualifiedinstitutionalbuyers(QIBs)intheU.S.totradeinprivateplacementissuesthatdonothavetomeetthestrictinformationdisclosurerequirementsofpubliclytradedissues12-7Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.GlobalBondsAglobalbondissueisaverylargebondissuethatwouldbedifficulttosellinanyonecountryorregionoftheworldGlobalbondissueswerefirstofferedin1989SimultaneouslysoldandsubsequentlytradedinmajormarketsworldwideMosthavebeendenominatedintheU.S.dollarPortionofaU.S.dollarglobalbondsoldbyaU.S.(foreign)borrowerintheU.S.isclassifiedasadomestic(Yankee)bondandtheportionsoldelsewhereisaEurodollarbond12-8Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.TypesofInstrumentsStraightfixed-rateissuesEuro-medium-termnotesFloating-ratenotesEquity-relatedbondsDual-currencybonds12-9Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.TypicalCharacteristicsofInternationalBondMarketInstruments

12-10Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.StraightFixed-RateIssuesStraightfixed-ratebondshaveaspecifiedmaturitydateandfixedcouponpaymentsUnlikemanydomesticbonds,whichmakesemiannualcouponpayments,couponinterestonEurobondsistypicallypaidannuallyVastmajorityofnewinternationalbondofferingsinanyyeararestraightfixed-rateissuesEuro,U.S.dollar,Britishpoundsterling,andJapaneseyenhavebeenthemostcommoncurrenciesdenominatingstraightfixed-ratebondsinrecentyears12-11Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Euro-Medium-TermNotesEuro-medium-termnotes(Euro-MTNs)are(typically)fixed-ratenotesissuedbyacorporationwithmaturitiesrangingfromlessthanayeartoabout10yearsEuro-MTNshaveafixedmaturityandpaycouponinterestonperiodicdatesUnlikeabondissue,inwhichtheentireissueisbroughttomarketatonce,aEuro-MTNissueispartiallysoldonacontinuousbasisthroughanissuancefacilitythatallowstheborrowertoobtainfundsonlyasneededonaflexiblebasisFirstintroducedin198612-12Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Floating-RateNotesFloating-ratenotes(FRNs)aretypicallymedium-termbondswithcouponpaymentsindexedtosomereferencerateCommonreferenceratesareeitherthree-monthorsix-monthU.S.dollarLIBORCouponpaymentsonFRNsareusuallyquarterlyorsemiannualandinaccordwiththereferencerateFirstintroducedin1970Attractiveoptionforinvestorswithastrongneedtopreservetheprincipalvalueoftheinvestmentshouldtheyneedtoliquidatetheinvestmentpriortothematurityofthebonds12-13Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Equity-RelatedBondsTherearetwotypesofequity-relatedbondsAconvertiblebondissueallowstheinvestortoexchangethebondforapredeterminedstraightfixed-ratebondvalueFloor-valueofaconvertiblebondisitsstraightfixed-ratebondvalueBondswithequitywarrantscanbeviewedasstraightfixed-ratebondswiththeadditionofacalloption(orwarrant)featureWarrantentitlesthebondholdertopurchaseacertainnumberofequitysharesintheissuerataprestatedpriceoverapredeterminedperiodoftime12-14Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Dual-CurrencyBondsAdual-currencybondisastraightfixed-ratebondissuedinonecurrencythatpayscouponinterestinthatsamecurrencyCouponinterestisfrequentlyatahigherratethancomparablestraightfixed-ratebondsAmountofthedollarprincipalrepaymentatmaturityissetatinception;frequently,theamountallowsforsomeappreciationintheexchangerateofthestrongercurrencyJapanesefirmshavebeenbigissuersofdual-currencybonds12-15Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.CurrencyDistributionofInternationalBonds

AmountsOutstanding(inbillionsofU.S.D.)

12-16Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.InternationalBondAmountsOutstandingClassifiedbyNationalityandTypeofIssuer(inbillionsofU.S.D.)12-17Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.InternationalBondMarketCreditRatingsFitchRatings,Moody’sInvestorsService,andS&PGlobalRatings(S&P)haveforyearsprovidedcreditratingsondomesticandinternationalbondsandtheirissuersRatingsarebasedonananalysisofcurrentinformationregardingthelikelihoodofdefaultandthespecificsofthedebtobligationRatingsreflectbothcreditworthinessandexchangerateuncertainty12-18Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.S&P’sSovereignRatingFramework

12-19Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.EurobondMarketStructureandPracticesPrimarymarketAborrowerdecidingtoraisefundsbyissuingEurobondstotheinvestingpublicwillcontactaninvestmentbankerandaskittoserveastheleadmanager(i.e.,bookrunner)ofanunderwritingsyndicatethatwillbringthebondstomarketLeadmanagermayinviteco-managerstoformamanaginggrouptohelpnegotiatetermswiththeborrower,ascertainmarketconditions,andmanagetheissuanceManaginggroup,withotherbanks,willserveasunderwriters,committingtheirowncapitaltobuytheissuefromtheborroweratadiscountfromtheissuepriceDiscount,orunderwritingspread,isusually2%-2.5%Sellinggroupwillsellbondstotheinvestingpublic12-20Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.EurobondTombstone12-21Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Exhibit12.9,showntotheleft,presentsatombstone(announcement)foradollar-denominatedEuro-medium-termnoteissueandtheunderwritingsyndicatethatbroughttheissuetomarket.EurobondMarketStructureandPracticesSecondarymarketEurobondsinitiallypurchasedintheprimarymarketfromamemberofthesellinggroupmayberesoldpriortotheirmaturitiestootherinvestorsinthesecondarymarketSecondarymarketforEurobondsisanOTCmarketwithprincipaltradinginLondonComprisesmarketmakersandbrokersconnectedbyanarrayoftelecommunicationsequipmentMarketmakersstandreadytobuyorsellfortheirownaccountbyquotingtwo-waybidandaskprices,andtheycantradedirectlywithoneanother,throughabroker,orwithretailcustomersBid-askspreadrepresentstheonlyprofittomarketmakers12-22Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ClearingProceduresEurobondtransactionsinthesecondarymarketrequireasystemfortransferringownershipandpaymentfromonepartytoanotherTwomajorclearingsystems,EuroclearandClearstreamInternational,havebeenestablishedtohandlemostEurobondtradesEuroclearisbasedinBrusselsandisoperatedbyEuroclearBankClearstreamislocatedinLuxembourgandwasestablishedin2000throughamergeroftwootherclearingfirms12-23Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ClearingProcedures(Continued)Bothsystemsoperateinasimilarmanner:EachclearingsystemhasagroupofdepositorybanksthatphysicallystorebondcertificatesMembersofeithersystemholdcashandbondaccounts.Whenatransactionisconducted,electronicbookentriesaremadethattransferbookownershipofthebondcertificatesfromthesellertothebuyerandtransferfundsfromthepurchaser’scashaccounttotheseller’sPhysicaltransferofthebondsseldomtakesplace12-24Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ClearingProcedures(