What is a Eurobond?

What is a Eurobond?

A Eurobond is a debt instrument that’s denominated in a currency other than the home currency of the country or market in which it is issued. Eurobonds are frequently grouped together by the currency in which they are denominated, such as eurodollar or Euro-yen bonds.

Since Eurobonds are issued in an external currency, they’re often called external bonds. Eurobonds are important because they help organizations raise capital while having the flexibility to issue them in another currency.

Issuance of Eurobonds is usually handled by an international syndicate of financial institutions on behalf of the borrower, one of which may underwrite the bond, thus guaranteeing the purchase of the entire issue.

How Do Eurobonds Work?

The essence of Eurobonds is that a company can choose any country to issue bonds depending on its economic and regulatory environment (e.g., interest rates in the country, economic cycle, market sizes, etc.). What makes the bonds attractive among investors is a small notional amount of a bond (face value or par value), which means that the bond is relatively cheap to obtain.

Importantly, Eurobonds are highly liquid and can be converted into cash within one fiscal year.

The categorization of Eurobonds is dependent on the currency in which the bonds were issued. If a US-based company decides to release Eurobonds in China in British pounds, then the bonds will be categorized as euro-pound bonds.

How is a Eurobond Issued?

Typically, financial institutions, such as investment banks, issue bonds on behalf of the borrower. If a bank will be responsible for the underwriting process, it implies a guarantee to the borrower that the whole bond issue will be sold in the primary market during the initial debt offering process.

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Please note that the term “Eurobond” refers only to the fact that the bond was issued in a different country and currency. It does not need to be a country in Europe. It can be whatever country in the world.

For example, Eurobonds can be issued in China and denominated in US dollars.

Eurobonds are issued by many institutions, such as:

  • Corporations
  • Governments
  • Syndicates

The primary reason for issuing Eurobonds is a need for foreign currency capital. Since the bonds are fixed-income securities; they usually offer a fixed interest rate to investors.