A eurobond is an international

bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Fidelity bond, a type of insurance policy for employers * Chemical bond, t ...

that is denominated in a

currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...

not native to the country where it is issued. They are also called external bonds. They are usually categorised according to the currency in which they are issued: eurodollar, euroyen, and so on. The name became somewhat misleading with the advent of the euro currency in 1999; eurobonds were created in the 1960s, before the euro existed, and thus the etymology is to "European bonds" rather than "bonds denominated in the Euro currency". The eurobond market was traditionally centered in the

City of London The City of London, also known as ''the City'', is a Ceremonial counties of England, ceremonial county and Districts of England, local government district with City status in the United Kingdom, city status in England. It is the Old town, his ...

, with

Luxembourg Luxembourg, officially the Grand Duchy of Luxembourg, is a landlocked country in Western Europe. It is bordered by Belgium to the west and north, Germany to the east, and France on the south. Its capital and most populous city, Luxembour ...

also being a primary listing center for these instruments. Eurobonds have since expanded and are traded throughout the world, with

Singapore Singapore, officially the Republic of Singapore, is an island country and city-state in Southeast Asia. The country's territory comprises one main island, 63 satellite islands and islets, and one outlying islet. It is about one degree ...

and

Tokyo Tokyo, officially the Tokyo Metropolis, is the capital of Japan, capital and List of cities in Japan, most populous city in Japan. With a population of over 14 million in the city proper in 2023, it is List of largest cities, one of the most ...

being notable markets as well. These bonds were originally created to escape regulation: by trading in US dollars in London, certain financial requirements of the US government unpopular with bankers could be evaded, and London was happy to welcome the business to grow their own finance sector. Since then, eurobonds have grown to be a more general way to perform financial operations in a currency while using the regulatory framework of a separate country.

Terminology

Eurobonds are named after the currency they are denominated in. For example,

Euroyen Eurocurrency is currency held on deposit outside its home market, i.e., held in banks located outside of the country which issues the currency. For example, a deposit of US dollars held in a bank in London, would be considered eurocurrency, as the ...

and

Eurodollar Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States. The term was originally applied to U.S. dollar accounts held in banks situated in Europe, but it expanded over the years to cover US dollar accounts ...

bonds are denominated in Japanese

yen The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro. It is also widely used as a third reserve currency after the US dollar and the euro. T ...

and American

dollars Dollar is the name of more than 25 currencies. The United States dollar, named after the international currency known as the Spanish dollar, was established in 1792 and is the first so named that still survives. Others include the Australian d ...

, respectively. Eurobonds were originally in

bearer bond A bearer bond or bearer note is a bond or debt security issued by a government or a business entity such as a corporation. As a bearer instrument, it differs from the more common types of investment securities in that it is unregistered—no ...

form, payable to the bearer and were also free of

withholding tax Tax withholding, also known as tax retention, pay-as-you-earn tax or tax deduction at source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the ...

. The bank paid the holder of the coupon the interest payment due.

History

The first eurobonds were issued in 1963 by Italian motorway network

Autostrade The ''autostrade'' (; : ''autostrada'', ) are roads forming the Italy, Italian national system of motorways. The total length of the system is about , as of 30 July 2022. There are also 13 motorway spur routes, which extend for . Most of the ...

, which issued 60,000 bearer bonds at a value of US$250 each for a fifteen-year loan of US$15m, paying an annual coupon of 5.5%. The issue was arranged by London bankers S. G. Warburg. and listed on the

Luxembourg Stock Exchange The Luxembourg Stock Exchange, LuxSE () is based in Luxembourg City at 35A boulevard Joseph II. The chairman of the board is Alain Kinsch and the chief executive officer is Julie Becker. History A law establishing a stock exchange in Luxemb ...

Allen & Overy Allen & Overy LLP was a British multinational corporation, multinational law firm headquartered in London, England. The firm has 590 partners and over 5,800 employees worldwide. In 2023 A&O reported an increase in revenue to GBP2.1 billion ...

, one of London's Magic Circle of law firms, were the lawyers on the transaction. Their conception was largely a reaction against the imposition of the

Interest Equalization Tax Interest Equalization Tax was a domestic tax measure implemented by U.S. President John F. Kennedy in July 1963. It was meant to make it less profitable for U.S. investors to invest abroad by taxing the purchase of foreign securities. The design ...

in the United States. The goal of the tax was to reduce the US balance-of-payment deficit by reducing American demand for foreign securities. Americans could bypass the costly tax and Europeans could keep open access to US capital.

Electronic form

Like other commonly traded securities, virtually all eurobonds now trade in dematerialized electronic

book-entry Book entry is a system of tracking ownership of securities where no certificate is given to investors. Several terms are often used interchangeably with "book entry" shares including "paperless shares", "electronic shares", "digital shares", "digi ...

form, rather than physical form. The bonds are held at central securities depositories (

Euroclear Bank Euroclear Bank is the international central securities depository (ICSD) of the Euroclear Group, based in Brussels, Belgium. It is one of the world's two main ICSDs, the other one being Clearstream Banking SA in Luxembourg. As of 2018, it was t ...

and

Clearstream Banking SA Clearstream Banking SA is one of two world-leading international central securities depositories, the other one being Euroclear Bank. It is a fully-owned subsidiary of the Clearstream Group, itself part of Deutsche Börse Group. History The ...

being the most common).''Corporate Bonds and Structured Financial Products'', Moorad Choudhry, 213. Coupons are paid electronically via the clearing systems to the holder of the eurobond (or their nominee account).

Terminology

History

Electronic form

References

Further reading