International Finance exam #3

Domestic Bond

issued by a borrower domiciled within a country and is denominated in domestic currency and traded within the country

Foreign bond

offered by a foreign borrower to investors in a national capital market and denominated in that nation’s currency

Eurobond

denominated in a particular currency but sold to investors in a national capital market other than the country that issued the denominating currency

who are the largest issuers of international bonds?

Financial corporations

what percentage of international bonds are Eurobonds?

80%

Bearer bonds

ownership is denominated through possession of the bond

Registered bonds

ownership associating the buyers name with the bond in the issuer’s records

What bonds must meet the same regulations as U.S. domestic bonds?

Yankee Bonds

What kind of currency do foreign investors prefer to raise in the Eurobond market?

U.S. Dollars

Rule 415

Allows for shelf registration which allows an issuer to preregister a

securities issue and then shelve the securities for later sale

when financing is actually needed.

Rule 144A

allows qualified institutional buyers (QIBs) in the United States to trade in

private placement issues that do not have to meet the strict

information disclosure requirements of publicly traded issue

Global Bond

-very large bond issue that would be difficult to sell in any one country or region of the world

-Simultaneously sold and subsequently traded in major markets worldwide.

-Most have been denominated in the U.S. dollar.

Straight fixed rate bonds

have a specified maturity date and fixed coupon payments

-domestic bonds pay interest semi-annually while Eurobonds pay interest yearly

-make up majority of new bonds

Euro-medium-term notes (Euro-MTNs)

typically) fixed-rate notes issued by a corporation with maturities ranging from less than a year to about 10 years

-have a fixed maturity

-is partially sold on a continuous basis through an issuance facility that allows the borrower to obtain funds only as needed on a flexible basis.

Floating-rate notes (FRNs)

medium-term bonds with coupon payments indexed to some reference rate

-three-month or six-month SOFR, which replaced LIBOR.

-pmts are usually quarterly or semiannually.

- investors with a strong need to preserve the principal value of the investment should they need to liquidate the investment prior to the maturity of the bonds.

Dual Currency bonds

straight fixed-rate bond issued in one currency that pays coupon interest in that same currency. At maturity, the principal is repaid in another currency.

- usually has a higher coupon interest rate than other bonds.

-Japanese firms are usually big issuers

-Maturity amount allows for some appreciation in the exchange rate of the stronger currency.

Convertible bond

allows the investor to exchange the bond for a predetermined number of equity shares of the issuer.

Bonds with equity warrants

-Can be viewed as straight fixed-rate bonds with the addition of a call option.

-Warrant entitles the bondholder to purchase a certain number of equity shares in the issuer at a prestated price over a predetermined period of time.

Reasons to cross list shares abroad

-Expand the investor base

-establish name recognition

-Bring the firm’s name before more investor and consumer groups

-Signal to investors that improved corporate governance is forthcoming

-May mitigate the possibility of a hostile takeover of the firm.

American Depository Receipt (ADR)

a receipt representing a number of foreign shares that remain on deposit with the U.S. depository’s custodian in the issuer’s

home market.

What are some advantages of ADRs

-Denominated in US Dollars and can be purchased through a regular broker

-Dividends received on the underlying shares are collected and converted to dollars by the custodian

-Trades clear in 3 business days

-registered securities that provide for the protection of ownership rights

-can be sold by trading the depository receipt to another investor in the U.S

-represent a multiple of the underlying shares

-give instructions to the depository bank as to how to vote the rights associated

Sponsored ADRs

created by a bank at the request of the foreign company

-Only type to be listed on the US stock markets

Unsponsored ADRs

created at the request of a U.S. investment banking firm without direct involvement by the foreign issuing firm.

-However, the foreign company may not provide investment information or financial reports

Look at table 13.6 on the slides

What does the turnover ratio measure?

stock market transactions over a period of time divided by the size, or market capitalization, of the stock market.

-the higher the turnover ratio, the more liquid, which means the more easier it is to trade in said market.

Market order

executed(buying) at the best price available in the market when the order is received, that is, the market price.

Limit order

an instruction to buy or sell a security at a specific price or better, giving traders control over the execution price but not guaranteeing the trade will occur.

Agency market

the broker takes the client’s order through the agent, who matches it with another public order.

Dealer market

the broker takes the trade through the dealer, who participates in trades as a principal by buying and selling the security for his own account.

Why does international diversification work?

because low correlation across countries

Systematic risk.

risk that remains even after investors fully diversify their portfolio holdings.

Sharpe ratio

measures the performance of an investment such as a security or portfolio compared to a risk-free asset, after adjusting for its risk. It is defined as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment returns. It represents the additional amount of return that an investor receives per unit of increase in risk

-A measure of how much extra return you get for the risk you take when investing.

Optimal International Portfolio (OIP)

Has the highest possible Sharpe Ratio