Loans rate
The global bond market grew rapidly during the 1980s and 1990s and has continued to do so in the new century. Bonds are an important means of financing for many companies. The most common kind of bond is a fixed-rate bond. The investor who purchases a fixed-rate bond receives a fixed set of cash payoffs. Each year until the loan rate bond matures, the investor gets an interest payment and then at maturity she gets back the face value of the bond.
International bonds are of two types: foreign bonds and Eurobonds. Foreign bonds are sold outside the borrowers country and are denominated in the currency of the country in which they are issued. Thus, when Dow Chemical issues bonds in Japanese Yen and sells them in Japan, it is issuing foreign bonds. Many foreign bonds have nicknames; foreign bonds sold in the United States are called Yankee Bonds, foreign bonds sold in Japan are Samurai bonds, and foreign bonds sold in Great Britain are bulldogs. Companies will issue foreign bonds if they believe it will lower their cost of capital. For e.g. in recent years, many companies have been issuing Samurai bonds in Japan to take advantage of very low interest rates. In early 2001, 10-year Japanese government bonds loan rate yielded 1.24 percent, compared with 5 percent for comparable U.S. government bonds. Against this background, companies found that they could raise debt at a cheaper rate in Japan than in the United States.
Eurobonds are normally underwritten by an international syndicate of banks and placed in countries other than the one in whose currency, the bond is denominated. For e.g. a bond may be issued by a German corporation, denominated in U.S. dollars, and sold to investors outside the United States by an international syndicate of banks. Eurobonds are routinely issued by multinational corporations, large domestic corporations, sovereign governments, and international institutions. They are usually offered simultaneously in several national capital markets, but not loan rate in the capital market of the country, or to residents of the country, in whose currency they are denominated. Historically, Eurobonds accounted for the lions share of international bond issues, but increasingly they are being eclipsed by foreign bonds.
Attractions of the Eurobond Market:
Three features of the Eurobond market make it an appealing alternative to most major domestic bond markets:
*An absence of regulatory interference
*Less stringent disclosure requirements than in most bond markets
*A favorable tax status
Regulatory Interference:
National governments often impose tight controls on domestic and foreign issuers of bonds denominated in the local currency and sold within their national boundaries. These controls tend to raise the cost of issuing bonds. However, government limitations are generally less stringent for securities denominated in foreign currencies and sold to holders of those foreign currencies. Eurobonds fall outside the regulatory domain loan rate of any single nation. As such, they can often be issued at a lower cost to the issuer.
Disclosure Requirements:
Eurobond market disclosure requirements tend to be less stringent than those of several national governments. For e.g. if a firm wishes to issue dollar-denominated bonds within the United States, it must first comply with Securities and Exchange Commission (SEC) disclosure requirements. The firm must disclose detailed information about its activities, the salaries & other compensation of its senior executives; stock trades by its senior executives, and the like. In addition, the issuing firm must submit financial accounts that conform to U.S. accounting standards. For non-US firms, redoing their accounts to make them consistent with U.S. standards can be very time consuming and expensive. Therefore, many firms have found it cheaper to issue Eurobonds, including those denominated in dollars, than to issue dollar-denominated bonds within the United States.
Favorable Tax Status:
Before 1984, U.S. corporations issuing Eurobonds were required to withhold for U.S. income tax upto 30 percent of each interest payment to foreigners. This did not encourage foreigners to hold bonds issued by U.S. corporations. Similar tax laws were operational in many countries at that time, and they limited market demand for Eurobonds. U.S. laws were revised in 1984 to exempt from any withholding tax foreign holders of bonds issued by U.S. corporations. As a result, U.S. corporations found it feasible for the first time to sell Eurobonds directly to foreigners. Repeal of the laws caused other governments including those of France, Germany, and Japan to liberalize their tax laws likewise to avoid outflows of capital from their markets. The consequence was an upsurge in demand for Eurobonds loan rate from investors who wanted to take advantage of their tax benefits.
THE GLOBAL EQUITY MARKET
As far as the growth of the global equity markets is concerned, strictly speaking there is no international equity market in the sense that there are international currency and bond markets. Rather, many countries have their own domestic equity markets in which corporate stock is traded. The largest of these domestic equity markets are to be found in the United States, Great Britain, Japan, and Germany. Although each domestic equity market is still dominated by investors who are citizens of that country and companies incorporated in that country, developments are internationalizing the world equity market. Investors are investing heavily in foreign equity markets to diversify their portfolios. Facilitated by deregulation and advances in information technology, this trend seems to be here to stay.
An interesting consequence of the trend toward international equity investment is the internationalization of corporate ownership. Today it is still generally possible to talk about U.S. corporations, British corporations, and Japanese corporations, primarily because the majority of stockholders of these corporations are of the respective nationality. However, this is changing. Increasingly, U.S. citizens are buying stock in companies incorporated abroad, and foreigners are buying stock in companies incorporated in the United States.
A second development internationalizing the world equity market is that companies with historic roots in one nation are broadening their stock ownership by listing their stock in the equity markets of other nations. The reasons are primarily financial. Listing stock on a foreign market is often a prelude to issuing stock in that market to raise capital. The idea is to tap into the liquidity of foreign markets, thereby increasing the funds available for investment and lowering the firms cost of capital. Firms also often list their stock on foreign equity markets to facilitate future acquisitions of foreign companies. Other reasons for listing a companys stock on a foreign equity market are that the companys stock and stock options can be used to compensate local management and employees, it satisfies the desire for local ownership and it increases the companys visibility with local employees, customers, suppliers, and bankers. Although firms based in developed nations were the first to start listing their stock on foreign exchanges, increasingly firms from developing countries who find their own growth limited by an illiquid domestic capital market are exploiting this opportunity. For e.g. firms from the Czech Republic are turning to the London Stock Exchange to raise equity capital.
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