Eurobonds - what is it in simple words? Eurobonds Manipulations

Eurobonds (or Eurobonds) are debt securities issued by countries. Their goal is to raise funds for a period of up to 40 years. What are Eurobonds in simple words? These are securities issued for the long term and which are circulating on financial platforms and markets. In addition to governments, they can be issued by large concerns, corporations that need money for a long period of time (on average, from three to forty years).

What are bonds?

Eurobonds are securities issued for a long period. Their emission is carried out for a specific market. Their circulation occurs in all financial centers around the world. Their placement is carried out by both commercial and investment credit institutions.

Borrowers here are national governments, large corporations, international companies that need long-term resources. For Eurobonds, the loan term is an average of 40 years.

Paper, like any other financial instrument, has several mandatory parameters:

1. The date on which the paper is due. It is then that the “life” of the paper ends, since it is paid off, and the issuer transfers to the investor the full amount of its value.
2. Nominal cost. That is, the amount that must be returned to the holder at the time of repayment of the paper. What are Eurobonds in simple words? This is the price that the issuer must pay when redeeming the paper from the holder at the time of termination of its circulation.
3. Interest income or coupon. Eurobonds are fixed-income securities, as a result of which, when they are issued, the issuer immediately pays a certain percentage of its nominal price, which will be paid to the investor every year.

Types of Eurobonds

The types of tools under consideration are distinguished:

1. Eurobonds. What it is? Bearer document. Placed on the markets of emerging economies. When they are issued, there is no need to leave collateral. Due to this, the release of these securities is more convenient.
2. Euronotes. Registered securities issued by states with a stable economic situation. Emission is subject to the availability of collateral.
3. T.N. dragon - papers placed only in Asian markets.

What are the advantages?

To answer the question: “Eurobonds - what is it?”, Consider their main advantages.

1. Ease of use.
2. Reliability of issuing persons.
3. The ability to completely avoid paying taxes, since the profit on these securities is paid in full without any income taxes.
4. Eurobonds can be held anonymously, as they are bearer issued.
5. The guarantor of the issue is large international banks.
6. Investments in these securities (including in Eurobonds of the Russian Federation) do not have currency risks: with fluctuations in the national currency, the yield on securities will remain the same).
7. At default, external debt is primarily repaid.
8. National bonds of the state do not have such profitability as currency Eurobonds.

What determines the price of paper?

As it has already become clear, the market value of the Eurobonds is a variable that is influenced by a number of factors:

• The level of rates that are set by the central banks of countries. With the growth of the key rate, the price of the Eurobonds decreases, since in such a situation it is more profitable for an investor to invest in deposits - risk-free instruments.
• Magnitude of demand. The classic rule is that with increasing demand for securities, their market value also rises. And vice versa.
• Market conditions formed at the auction.For example, during a crisis, the cost of paper decreases sharply, because the risk of non-payment on it increases due to a decrease in the financial strength of issuers.

But as the maturity date approaches, the market price of the paper will be adjusted and may reach up to 100% (i.e., to the face value price). In other words, as the maturity date of Eurobonds approaches, the size of fluctuations in the market value of the paper decreases.

How is market regulation?

All those who work in the market of financial instruments under consideration are members of ICMA, a self-regulatory international organization of capital market participants.

Location - Zurich.

The Association drafted and implemented the rules and requirements by which Eurobonds are now traded and resolves disputes. All its members will also be checked to meet these requirements.

The attractiveness of this type of financial instrument lies in the lack of regulation by the authorities.

What is in Russia?

Eurobonds of Russian issuers and their entry into the international financial market are within the framework of Russian legislation:

• This method of raising funds can only be used by companies that have organized the issue of their own shares. Moreover, it is possible to attract only an amount that does not exceed the size of the authorized capital.
• There are restrictions on the issue of unsecured securities by anything: in the national legislation only the right to issue securities is secured only on the security of property.

As a result, Eurobonds of Russia are securities of reliable organizations that have been operating for at least three years. These are companies that have confirmed all of their financial statements over the past few years.

The risks of investing in these securities

Despite the fact that Eurobonds are issued by large enterprises and governments, there are still certain risks associated with their acquisition:

1. Credit. No matter how large and stable the organization is, there is always a risk of bankruptcy, which will result in its inability to cover its debt. Profit on Eurobonds can also be called a measure to level risk: an increase in yield leads to increased risks and vice versa.
2. Risk of bid adjustments. There is a possibility of adjusting the conditions for granting loans, emissions, the economic and political situation in individual states and in the world. For an individual, these are fluctuations in the value of acquired Eurobonds. What it is: this is an increase in the key interest rate in the country, adjustments to the LIBOR rate. Often this negatively affects the yield of the paper.
3. Profitability risk. It arises due to the fact that Eurobonds are an over-the-counter instrument, which is why clients often work through several brokers. That is, if it becomes necessary to quickly sell securities due to an unstable situation in the market, for example, then it will be very difficult to do this at an adequate cost. Especially if the investor is holding a speculative category of securities (second and third tier Eurobonds). The increase in profitability can be partially characterized by the volume of issue: in the case of a small issue (up to $ 250 million), the liquidity of the securities will be small.
4. Currency. For Eurobonds it is very characteristic, because in most cases they are issued in monetary units that differ from those of the issuer. The issue currency is either the euro or the US dollar. Therefore, with negative fluctuations in these currencies, a negative revaluation of Eurobonds occurs. Conversely, when the ruble is devalued, the investor receives additional profit from the purchase of these securities.

Pitfalls in handling Eurobonds

In addition to the risks associated with their purchase, there are some difficulties in handling them. For example, few people know how the prices of these securities are formed.There is no single source with reliable and up-to-date price information, and the price of a paper in a real transaction can differ significantly from that indicated in the trading terminal. In other words, even if you have access to the Bloomberg and Reuters platforms, where the prices of all the main participants are indicated, you cannot be sure that a purchase or sale transaction will be held at this price.

A question also arises in the place of storage of securities that the investor bought. In general, Eurobonds transactions go through Clearstreem and Euroclear. But the depository in Russia can also act as a storage place, and the operations of their receipt go through foreign subsidiaries.

How to create an optimal portfolio?

The price of a Eurobond, in most cases, is expressed in euros or US dollars. If there are all prerequisites for the crisis and a desire to save their capital, there is no need to spend time and convert money to currency. The best recommendation here is to purchase Eurobonds. What is it: for securities issued by countries, the yield can be about 10% per year, from corporations where there is a state share, up to 13%, from large concerns - generally up to 25% per annum.

And all this without loss during the exchange of one currency to another and vice versa.

A competent approach to investing is diversification of the securities portfolio. Eurobonds are no exception: it is more advisable to purchase securities of different issuers. At the same time, the timing of Eurobonds can also be different, which for the most part affects the interest rate.