Borrower Consider Before Issuing Dual-Currency Bonds
The international market of bonds is a market for investments similar to the stock market. In this market, bonds are traded over the counter unlike in the stock market, which deals with exchanges. However, there are special types of bonds in the international market that are traded on exchanges. The international market of bonds has attracted a large number of investors to trade in it, most of who have admitted that trading in this market is a difficult task at first but gets easier with time. This paper will, therefore, explore the process of bringing a new international bond to the market as well as factors to be considered by investors and borrowers before issuing and investing in dual currency bonds respectively.
The process of bringing a new international bond issue to the market
When a borrowing company wishes to place a bond in this market, they first seek the consent of a bank that will eventually act as the lead manager to underwrite a syndicate. The syndicate is then responsible for bringing the bonds into the market. The selected bank goes ahead to make invitations to other banks who will also become underwriters. The invited banks together with the lead manager (selected bank), determine if the market conditions will be favorable to introduce the bond before negotiating with the borrower (Eun and Resnick, 2009). Thereafter, the banks commit part of their capital to buy the bonds at a discounted price before selling them to the public. Once sold, the lead manager gets a full spread of the share while the other underwriting banks get part of the spread.
Factors a borrower should consider before the issue of dual-currency bonds
By definition, dual-currency bonds are those bonds that are straight and with fixed rates issued in one type of currency (Eun and Resnick, 2009). The coupon interest is normally paid using the issuing currency. However, on maturity, the principal is normally paid using a different type of currency. The fact that two different types of currencies are involved in the payment of the same bonds, they are called dual-currency bonds. This means that the bonds will be affected by changes in the exchange rates of the two currencies. As such, borrowers should consider the exchange rates of both currencies before issuing the dual currency bonds. This is because the exchange rates could affect the value of the bond, especially at maturity. For instance, if the borrower issues a bond when the payoff is low but later appreciates at the time of the bond maturity, the principal repayment will be lower in the issuing currency. This will in turn mean a great loss to the borrower.
Factors to be considered by investors before investing in dual-currency bonds
In the same way, a borrower of a dual-currency bond is concerned about the value of the currency exchange rates, so is an investor. This is because, if the payoff currency happens to depreciate after the investor has bought the bonds, the investor will suffer a loss referred to as the exchange rate loss, which is caused by the depreciation of the currency. In the event that the payoff currency appreciates, the investor will gain from the exchange rate. Therefore, it is advisable that the investor invests in dual currency bonds when the payoff currency is low such that after appreciation, the investor can benefit and not suffer losses.
Eun, C., and Resnick, B. (2009). International Financial Management. Irwin, McGraw-Hill.