Chapter XII International Bond Markets 1

Despite the complexity associated with the bond market, a bond is simple and it might be consider a bit boring when compared with a stock. After all, a stock represents a piece of a company's wealth. An evaluation of a stock requires an evaluation of the entire company's worth. An ordinary bond is an agreement that merely entitles one party to make and another to receive a series of cash flows. While differences among forms of equity are small, there is a wide range of bonds; innovative financial engineers are creating new fixed-income securities almost continuously. In this chapter, we will introduce a wide variety of bond types used in international bond markets. Then, we will describe how bond markets are organized around the world. Finally, we will show how tools and concepts used in international bond markets. I. Introduction to International Bond Markets Debt certificates have been traded internationally for several centuries. Kings and emperors borrowed heavily to finance their wars. In the 14th century, for example, Edward I financed his wars through bond issues launched in Italy by the then big banking families. Centuries later, the great coalition against Louis XIV led by William of Orange was financed by a group of Dutch families operating from The Hague. Later, the Rothschilds became famous for supporting the British war effort against Napoleon I through their European family network. Although debt financing has always been international in nature, there is still no unified international bond market. The international bond market is divided into three bond market groups: i. Domestic bonds. They are issued locally by a domestic borrower and are usually denominated in the local currency. ii. Foreign bonds. They are issued on a local market by a foreign borrower and are usually denominated in the local currency. Foreign bond issues and trading are under the supervision of local market authorities. iii. Eurobonds. They are underwritten by a multinational syndicate of banks and placed mainly in countries other than the one in whose currency the bond is denominated. These bonds are not traded on a specific national bond market. Example XII.1: Distinction between bond markets. (A) Domestic bonds. In February 2015, Apple, the U.S. tech giant, issued bonds for USD 6.5 billion in the U.S. for placement in the U.S. domestic market. The issue was underwritten by a syndicate of investment banks: Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, and JP Morgan. The issue is denominated in the currency of the intended investors, i.e., USD. XII.1 (B) Foreign bonds. In August 2015, Apple issued bonds for AUD 2.25 billion for placement in the Aussie market alone. The issue was underwritten by a syndicate of securities houses, with Goldman Sachs, Commonwealth Bank and Deutsche Bank as the lead managers. (C) Eurobonds. In September 2015, Apple issued bonds for EUR 2.8 billion, in London. The issue was underwritten by an international syndicate of securities houses, led by Goldman Sachs and Deutsche Bank. The issue is denominated in EUR to be traded mainly in London, but also in other markets. ¶ Foreign bonds issued on national markets have a long history. They often have colorful names: Yankee Bonds (in the U.S.), samurai bonds (in Japan), Rembrandt bonds (in the Netherlands) and bulldog bonds (U.K.). Government regulations have forced many international borrowers to leave foreign bond markets and borrow instead in the Eurobond market. The Eurobond market has had a fantastic growth during the past 30 years. At its inception, in the early 1960s, the Eurobond market was mainly a Eurodollar bond market, that is, a market for USD bonds issued outside the U.S. Today, the Eurobond market comprises bonds denominated in all the major currencies and several minor currencies. Together the foreign bond and Eurobond markets make up the international bond market. As we will see below, Eurobonds are no different from domestic or foreign bonds. The distinction between these markets is based on technical and historical reasons. For example, as illustrated in Example XII.1, a difference between foreign and Eurobond markets is the composition of the underwriting syndicate. 1.A Euromarkets The Eurobond market is an offshore market where borrowers and lenders meet because of its lower costs and lack of regulation. The Eurobond market is just one segment of the so-called Euromarket, which also includes Eurocurrency, Euronotes, Eurocommercial paper, and Euroequity markets. Euromarkets are offshore capital markets, in the sense that the currency of denomination is not the official currency of the country where the transaction takes place. For example, a Malayan firm deposits USD not in the U.S. but with a bank outside the U.S., for example in Singapore or in Switzerland. This USD deposit outside the U.S. is called an Eurodeposit. Today, Euromarkets are well-developed, sophisticated markets where the traded instruments are denominated in many currencies, not just in the major currencies. For example, in 1996, the Eurobond market included issues denominated in the Egyptian pound, Polish zloty and Croatian kuna. At its inception, however, Euromarkets were just Eurodollar markets. For example, the first Euromarket was the market for short-term USD deposits and USD loans, where European banks acted as intermediaries between investors and borrowers. 1.A.1 Origins of Euromarkets XII.2 Long before World War II it was not rare for banks outside the U.S. to accept deposits denominated in U.S. dollars. The volume of such deposits, however, was small and the market for them had little economic significance. During the 1950s things began to change. Since Russia and other communist countries had to deal in hard currency for their international trade transactions, the central banks of these countries ended up holding USD balances. Initially these balances were held in New York. But as the cold war tensions increased, the communist government transferred these balances to banks in London and other European centers. While the cold war may have initiated the Eurocurrency market, there were other factors that stimulated its development. Historically, the pound sterling played a key role in world trade. A great deal of trade was denominated in GBP. Two events helped to boost the USD as the currency for international trade: (1) The sterling crisis in the U.K. in the mid-1950s. In 1957, the U.K. imposed controls on nonresident GBP borrowing and lending by U.K. banks. These institutions then turned to the USD to finance their international trade. (2) In 1958, West European countries in preparation for the creation of the EEC (now, EU) allowed banks to trade freely in USD to finance trade. On the hand, the U.S. government, unknowingly, gave a very important stimulus to the growth of the Euromarket with several regulations. During the 1960s the U.S. government imposed several measures to control international capital flows. These measures were aimed to improve the U.S. balance of payments, which was in a big deficit: (1) In 1963, the U.S. government imposed an Interest Equalization Tax (IET) on foreign securities held by U.S. investor. The government's idea was to equalize the after-tax interest rate paid by U.S. and foreign borrowers, and, thus, discourage U.S. residents to buy foreign securities (reducing capital outflows). The IET forced non-U.S. corporations to pay a higher interest rate in order to attract U.S. investors. Therefore, non-U.S. corporations started to look into the Euromarket to borrow USD. (2) Since the IET did not reduce significantly capital outflows, the U.S. Federal Reserve imposed another financial regulation in 1965, the Foreign Credit Restraint Program (FCRP). The FCRP restricted the amount of credit U.S. banks could extend to foreign borrowers. Foreign subsidiaries of U.S. multinational corporations were considered "foreign", under the FCRP. The government's idea behind the FCRP was to reduce capital outflows. The FCRP started as a "voluntary" program but was changed to a mandatory program in 1968. Again, foreign borrowers and U.S. subsidiaries were forced to go somewhere else to borrow USD. (3) In 1968, the government passed the Foreign Investment Program, which limited the amount of domestic USD U.S. corporations could use to finance foreign investments. In addition, for a long time, the Federal Reserve Board regulated the interest rates that U.S. banks could pay on term deposit. This regulation was called Regulation Q. The tight money years of 1968 and 1969 made money market rates to rise above the rates banks where allowed to pay under XII.3 Regulation Q. Regulation Q, widened the interest differential between a USD deposit in the U.S. and a USD deposit abroad. All these restrictions brought the major financial institutions to European money centers like London, Zurich, and Luxembourg. This development had some spillover effects on financial centers in other parts of the world such as Tokyo, Hong Kong, Singapore, Beirut, Bahamas, and Bahrain. Several European governments also imposed capital controls during this period, which triggered the creation of the non-USD segments of the Eurocurrency market. For example, during the 1970s, the Bundesbank required foreigners with DEM accounts to place a fraction of their funds in noninterestbearing accounts. This regulation gave an incentive to foreigners to make DEM deposits outside Germany, and, then, the Euro-DEM was born. The regulations and restrictions that gave birth to Euromarkets have all disappeared. Euromarkets, however, have continued to grow. Today, Euromarkets are free from regulations, exempt from national taxes and reserve requirements. These conditions allow international banks to take advantage of the lower cost of funds. Then, they can lend the funds to international borrowers at lower rates than those that can be obtained in domestic markets. 1.A.2 Eurocurrency Markets The first Euromarket to emerge was the market for short-term deposits and loans, where banks acted as intermediaries between investors and borrowers. The Eurocurrency market for short-term deposits -Eurodeposits- rapidly became a reference market for domestic market-makers. For example, several domestic instruments started to be priced taking the interest rate on Eurodeposits as the relevant discount rate. When Eurocurrency markets started to emerge, a typical Eurodeposit involved a time deposit, that is, a non-negotiable, registered instrument with a fixed maturity. When investing in a Eurocurrency time deposit, the investor commits funds for a certain period of time, at a specified rate. At maturity the investor receives the principal plus the interest. Later, Eurodeposits included more flexible instruments. The most popular instrument is the certificate of deposit (CD), which is negotiable -can be sold to another investor at any time- and is often a bearer instrument. There are several kinds of CDs: tap CDs, tranche CDs, and rollover CDs. The tap CD is a standard fixed-time deposit, which is denominated in amounts of USD 1 million or more. The trance CD is a tap CD that has been divided into several portions to make it attractive to small investors. The rollover CD is an instrument by which an investor buys a CD on a continuous basis with floating interest rates adjusted by market conditions when the CD matures and rollovers occur. According to the Bank of England more than 90 percent of the Eurodeposits are time deposits. The majority of the Eurodeposits have a very short-term duration, for example, one or seven days, or one, three, or six months. For long-term CDs (up to ten years), there is a fixed coupon or floatingrate coupon. For CDs with floating-rate coupons, like rollovers, the life of the CD is divided into subperiods of usually six months. The interest earned over such period is fixed at the beginning of the period, the reset date. This interest rate is based on the prevailing market interest rate at the time. XII.4 This market rate is usually the LIBOR, the London Interbank Offer Rate or the Interbank Offer Rate in the currency's domestic financial center. Although the majority of Eurodeposits are in the form of time deposits, CDs play a significant role in the Eurocurrency market because of a liquid secondary market. Banks, regularly, buy and sell their own CDs in the secondary market to insure investor of the liquidity of the secondary market, and therefore, making the CDs more attractive. The CD rates shown in newspapers are usually the secondary market rates. Most CDs issued in London are denominated in USD. In general, the deposits will be effective two business days after the contract is in effect, and mature, for example, 30 days later. On maturity, payment is usually made by a transfer in the currency's home country (i.e., Japan for Euroyen). The minimum period for delivery of funds is usually two working days, which is the usual settlement period in the wholesale foreign exchange market. Example XII.2: A Eurodollar Transaction Suppose IBM has USD 1 million in excess cash available for a week. IBM decides to invest this USD 1 million in a 7-day deposit. Bank of New York pays 5.25% for a 7-day domestic deposit. Banco Santander Central Hispano (BSCH) has a bid rate of 5.50% for a 7-day Eurodollar time deposit. IBM deposits the USD 1 million with Banco de Santander for 7 days. The transaction involves the following steps: i. BSCH must have a USD bank account with a U.S. bank, say, with Citibank. ii. IBM deposits USD 1 million with Citibank for credit to the account of BSCH. iii. BSCH withdraws the funds from its account at Citibank. iv. In 7 days, BSCH transfers USD 1 million plus accrued interest through its account at Citibank to the account designated by IBM. Note that if Bank of New York had received the deposit, they should have set aside a part of the deposit as reserve, as specified by the U.S. Federal Reserve. BSCH is free to loan the Eurodeposit to anyone, without any reserve requirement. The absence of reserve requirements lowers BSCH costs. ¶  Eurobanks: More competitive rates As we mentioned above, the unregulated framework allows Eurobanks to be more competitive than domestic regulated banks. In general, due to competition and the unregulated nature of Eurobanking, we observed that the domestic deposit rate is lower than the London Interbank Bid Rate (LIBID) and the domestic lending rate is higher than the LIBOR.  1.B Eurobonds: Some Descriptive Statistics 1.B.1 Borrowers According to the BIS, in 1999, the total amount borrowed in the international bond market was USD 1,152.7 billion. The major borrowers on the international bond markets were industrial countries XII.5 (93% of total amount borrowed in 1999). The U.S. (39%), and the Euro area (40%) were by far the heaviest borrowers. The heaviest largest borrowers were financial institutions, with a 51% share. The corporate sector issues and the public sector –governments and state agencies—issued 30% and 17% of the international bond debt, respectively. Supranational corporations –the World Bank, European Investment Bank, Asian and African Development Banks, the European Community-- had seen their participation substantially decreased in the last 5 years: from 4.22% in 1995 to 2% in 1999. 1.B.2 Size and Instruments Few investors would consider an investment strategy that systematically excludes the fixed-income market from his or her portfolio. Yet, U.S. investors routinely ignore non-USD bonds, which account for almost 55 % of the world bond market. Table XII.A presents the major bond issues, by currency of denomination and sector. TABLE XII.A INTERNATIONAL BOND MARKETS (Nominal Value of New Offerings (Net), Billions of USD, 2015) Bond Market Straight Floating Equity- Related Total USD 391.3 67.2 10.2 468.7 EUR area 284.1 99.8 24.7 387.7 JPY 13.9 4.4 5 20.9 GBP 42.2 28.0 0.2 70.4 CHF 6.8 1.1 - 4.0 Total 784.4 208.6 31.1 1010.0 Source: BIS According to the BIS, governments and state agencies mainly borrow in the straight (fixed) rate market (92%). Corporations also tend to borrow in the straight rate market (74%). On the other hand, financial institutions have a more balanced borrowing portfolio: 54% in the straight rate segment, and 44% in the floating rate segment. 1.C Type of Bond Instruments The variety of bonds offered to the international or even domestic investor is amazing due to the recent development of bonds with variable interest rates and complex optional clauses. (For a review of the basic concepts and techniques behind bonds, see Appendix XII.) Most issues on the international bond market, however, are fixed interest bonds, see Table XII.A. The most popular instruments in international bond markets are: XII.6  Straight or fixed income bonds: a fixed income bond is a financial instrument with specific interest payments on specified dates over a period of years. On the last specified date, or maturity, the payment includes a repayment of principal. The interest rate or coupon is expressed as a percentage of the issue amount and is fixed at launch. For the issuer, the attraction of these bonds is the knowledge of level payments on interest and a set repayment schedule. For investors, the attraction of straight bonds lies in a known income. Example XII.3: Straight bond. In January 2004, Companhia Vale do Rio Doce (CVRD) issued straight coupon Eurobonds, with the following terms: Amount: Maturity: Issue price: Coupon: YTM: USD 500 million. January 2034 (30 years). 100% 8.25% payable annually 8.35% (Brazil’s government bonds traded at YTM 9.02% at the time) Note: CVRD, which is the world's largest iron ore miner, was initially planning to sell USD 300 million worth of the bonds, but ended up placing USD 500 million thanks to strong demand that surpassed USD1 billion. ¶  Partly-paid bonds: these are standard straight bonds in all respects but for the payment of principal by investors on the closing date of the issue -which is limited to 0-33 percent of the principal amount, with the balance falling due up to six months later. These bonds are popular with issuers who can tailor the second payment to their cash flow requirements. Example XII.6: Partly-paid bonds. In April 1998, the European Investment Bank (EIB) issued a partly-paid GBP bond in which investors only hand over 25% of the principal. The remaining 75% will be paid in 12 months. The GBP bond raised GBP 300 million and was aimed at overseas investors attracted by the relatively high yield on offer in the UK but concerned about the unusually strong GBP. ¶  Zero-coupon bonds: a zero-coupon bond is a straight bond with no schedule of periodic interest payments. The cash flow consists of two payments, the receipt of the proceeds on issue date and the repayment of principal on maturity. For the issuer, zero coupon bonds are an ideal financing instrument for a project, which generates no income for some years. On the other hand, the loading of the debt service of the bond into a single payment some years later creates a higher credit risk. For this reason the market is confined to highly rated borrowers. Investors are attracted to zero-coupon bonds to meet future liabilities. Example XII.4: Zero-coupon bonds ("zeros"). In June 1981, PepsiCo Overseas issued zero-coupon Eurobonds, with the following terms: Amount: Maturity: Issue price: USD 100 million. June 1984 (3 years). USD 67.255. XII.7 Redemption price: 100% Since the bonds would be repaid in three years at 100 percent of face value, the compounded annual interest yield was (100/67.25)1/3 - 1 = 14.14%. By contrast, in 1985, Deutsche Bank Finance N.V. issued a zero-coupon bond with the following terms: Amount: Maturity: Issue price: Redemption price: USD 200 million 10 years. USD 100. 287% The interest yield on this issue by Deutsche Bank Finance was: (287/100)1/10 - 1 = 11.12%. ¶  Floating rate notes (FRNs): FRNs are a medium-term instrument similar in structure to straight bonds but for the interest base and interest rate calculations. The coupon rate is reset at specified regular intervals, normally 3 months, 6 months, or one year. The coupon comprises a money market rate (e.g., the London Interbank Offered Rate for 6-month deposits, or LIBOR) plus a margin, which reflects the creditworthiness of the issuer. FRNs usually carry a prepayment option for the issuer. Issuers like FRNs because they combine the lower pricing of a bank loan and larger maturities than the straight bond market. Investors are attracted to FRNs because the periodic resetting of the coupon offers the strongest protection of capital. Example XII.5: FRNs ("floaters"). In January 2004, The United Mexican States (UMS) issued a USD Eurobond, with the following terms: Amount: Maturity: Issue price: Coupon: USD 1,000 million. January 2009 (5 years). 99.965 6-mo LIBOR + 70 bp payable quarterly. At the time the notes were offered, 6-mo LIBOR was 3.64 percent. So for the first three months Christiania Bank paid an interest at an annual rate of 3.64% + .70% = 4.64%. Afterward, at the end of each six-month period the interest rates on the bonds are updated to reflect the current 6-mo LIBOR rate for dollars. ¶  Perpetual FRNs: They are FRNs but have no maturity date. Issuers have a call option to prepay investors. Perpetual FRNs usually have investors put options or options to exchange the undated bonds for bonds with finite maturity. Perpetual FRNs have subordinated status and in some cases junior subordinated status, so they can rank close to equity. As a quasi-equity instrument, they qualify as capital, and for the purposes of capital adequacy, are treated as equity.  Convertible bonds: A convertible bond is a bond that can usually be exchanged or converted at the XII.8 option of the holder into other assets at a fixed conversion rate set at time of launch. Convertible bonds are usually launched in conditions of poor fixed-rate bond markets, high interest rates and an expectation of falling rates. Issuers benefit from (1) the lower funding costs relative to short-term money markets and (2) the possibility of no repaying the principal if the conversion right is exercised. Investors benefit because they receive the benefit of regular coupon payments plus the option of locking in to a better yield later. Example XII.7: Convertible bonds ("convertibles"). In March 2000, the Swiss company Roche Holdings issued convertible bonds (“Sumo bond”) with the following terms: Amount: Maturity: Coupon: Issue Price: Conversion structure: Conversion period: JPY 104,600,000,000. March 2005 (5 years). 0.25% payable annually. 96.4% Each bond of JPY 1,410,000 par value is exchangeable for one non-voting equity security of Roche Holding Ltd at an exchange ratio of 1.03292. At any time after the first interest payment. That is, if the conversion right is exercised each USD 10,000 bond would buy 597.13 ADRs. ¶ Example XII.8: Convertible bonds into other bond. In May 1983, CEPME issued Eurobonds with the following terms: Amount: Maturity: Denominations: Coupon: Conversion structure: Conversion exchange rate: Conversion period: GBP 35 million. May 1995 (12 years). GBP 1,000 11.25% payable annually. Each bond is convertible at the bondholder's option into a USD 12-year FRN paying semiannual dollar interest equal to six-month LIBOR. 1.55 USD/GBP At any time after the first interest payment. That is, if the conversion right is exercised each bond would buy a USD 1550 12-year FRN. ¶  Bonds with warrants: Bonds with warrants resemble convertibles except that the warrant can be traded separately. The proceeds from the warrants are applied to the reduction of the cost of the host bond. Bonds can have equity warrants, bond warrants, or commodity warrants attached. Bonds with equity warrants differ from convertible bonds in one other aspect: when the warrants are exercised new money is normally used to subscribe for the shares, and the total capitalization of the borrower increases. This is unlike the conversion of a convertible bond, which merely shifts debt capital into equity capital. The equity warrant is effectively a call option on the underlying stock. Therefore, pricing a warrant relies on (1) variations of the Black-Scholes formula, and (2) a market view based on supply and demand. Example XII.9: Bonds with equity warrants. XII.9 In May 1990, Cannon issued Euro-USD bonds with equity warrants attached. The terms of the issue are as follows: Amount: Maturity: Denominations: Coupon: Number of warrants: Warrants per bond: Shares per warrant: Exercise price: Conversion exchange rate: Exercise period: USD 370 million. May 31, 1995 (5 years). USD 5,000 4% 74,000 1 468.06 JPY 1487 139.2 JPY/USD At any time after the first interest payment, ending one week before the maturity of the bond. Almost all Japanese Euro-USD bonds with equity warrant attached (USD Eurowarrants) have similar terms to the Cannon's issue. ¶ Eurowarrants dominated Japanese new issue financing during the Japanese bull market of the late 1980s. Japanese warrants, as they were called, were issued in USD, DEM, CHF, FRF, NLG, GBP, ECU, and JPY. Almost all Japanese warrants have been issued outside Japan, and as such are principally traded OTC in various European centers.  Dual-currency bonds: Dual-currency bonds are bonds that are purchased in terms of one currency but pay coupons or repay principal at maturity in terms of a second currency. Japanese firms have frequently issued CHF-denominated bonds convertible into common shares of a Japanese company. A foreign investor can benefit from purchasing this bond in any one of three situations: (1) A drop in the market interest rate on CHF bonds (as on any straight CHF bond). (2) A rise in the price of the company's stock (because the bonds are convertible into stocks). (3) A rise in the JPY relative to the CHF (because the bond is convertible into a JPY asset). Dual currency bonds represent a combination of an ordinary bond combined with one or more forward contracts. Example XII.10: Dual-currency bonds. In July 1985, Swiss Bank Soditic led the issue of a dual currency bond for First City Financial. Each bond could be purchased for its full face value of CHF 5000. Interest on these bonds is paid on CHF. At maturity, at the end of ten years, the bond principal will be repaid in the amount of USD 2,800. At the time of the issue, this bond could be view as the combination of (a) an ordinary ten-year CHF bond that would repay principal in the amount of CHF 5000, plus (b) a ten-year forward contract to buy USD 2800 at 1.7857 CHF/USD (=CHF 5000/USD 2800). ¶ Exhibit XII.1 presents the advertisement of a bond issued in 1986 by NKK. This bond is a dual currency bond. XII.10 Exhibit XII.1 Eurobond Tombstone These securities have been sold outside the United States of America and Japan. This announcement appears as a matter of record only. NEW ISSUE 17th April, 2010 NTK Nakatomi Tsushin Koygo 1 per cent. Dual Currency Yen/British Pound Bonds Due 2020 Issue Price: 100 per cent. of the Issue Amount Issue Amount: Redemption Amount at Maturity: Nomura International Limited CFS International JPY 30,000,000,000 GBP 120,000,000 Mitsubishi Trust & Banking Corporation Yamaichi International (Europe) Limited Bankers Trust International Limited Crédit Lyonnais Credit Suisse First Boston Limited Dresdner Bank Aktiengesellschaft EBC Amro Bank Limited Fuji International Finance Limited Housemann Bank International Banca Nazionale del Laboro Lloyds Mercant Bank Limited Morgan Guaranty Ltd Morgan Stanley International Bertoni Bank Limited Banco Santander Central Hispano Union Bank of Switzerland (Securities) S.G. Warburg & Co. Ltd. XII.11 There are several points worth noticing: i. The underwriting syndicate is made up of banks from numerous countries (Japan, the U.S., Germany, Italy, Spain, and Switzerland). ii. U.S. commercial banks (Morgan Guaranty, Bertoni Bank) participate, as well as U.S. investment banks (Morgan Stanley, CFS). Note, however, that the British subsidiaries of the U.S. banks are involved and not U.S. head companies (note the word limited after the name of the bank). iii. This is dual-currency bond: it is issued in JPY (30 billion) with interest coupons fixed in yen (8%), but its principal repayment is fixed in GBP (120 million).  Applied Corner: Currency crises close markets The 1997 Asian currency crisis had as one of the main casualties, the Asian convertible bond market. For example, in the November 1997 issue of Euromoney a trader says: "we are even marking down the convertible Eurobond for Kepco, the South Korean electricity utility, as a sell which I never imagined we would have to do." Asian's equity prices have fallen so far that, according to a Salomon Brothers trader, most existing convertibles are trading as straight bonds because the equity conversion element has become effectively valueless. "The hardest hit convertibles have been those that have had redemption to a fixed amount of local currency," said a vice-president of Merrill Lynch in Euromoney. So great was the effect of the crisis that the new issue sector in Asia virtually grounded to halt. At least USD 2 billion worth of convertibles for Korean companies were delayed until early 1998. Source: Euromoney, November 1997.  II. Eurobond Markets 2.A Historical development of the Eurobond Market The growth of the Eurobond market was extraordinary. Shortly after the introduction of the Interest Equalization Tax, in June 1963, the first offshore bond issue denominated in U.S. dollars was launched. In the same year a total of USD 145 million in new Eurobond issues was raised, and by 1968 the volume had risen to USD 3 billion. On the strength of its early success, the Eurobond market quickly established itself: i. It had a marketplace in London. ii. The U.K. authorities allowed the market to develop without regulations or restrictions. London became, and remains today, the principal center for new issues and the trading of USD denominated Eurobonds. iii. The speed and simplicity of issuing in the Eurobond market compared favorably with the principal foreign bond market, the U.S. Yankee market. iv. The establishment in 1969 of the Association of International Bond Dealers (AIBD) provided a forum for improving the design of the market. v. The early establishment of a clearing system, Euroclear and Cedel in 1969 and 1970, XII.12 respectively, resolved the problem of delivery and custody. The repeal of all the U.S. regulation did not slow the growth of the U.S. dollar Eurobond market. When the IET was abolished in 1974, the share of the U.S. foreign bond market increased but not substantially. Later, in 1984, the U.S. government, to make its domestic bond market more competitive, abolished the withholding tax imposed on foreign lenders. Many people thought that this change in the U.S. tax code would result in the absorption of the Eurodollar bond market into the U.S. foreign bond market. The Eurodollar bond market continued to grow. International issuers were tired of the delays and costs of registering new issues with the S.E.C. The Eurobond market, because of its lack of government regulation, continues to be the dominant international bond market. The abolition of the U.S. withholding tax triggered, however, similar fiscal liberalization in European countries and was followed by the dismantling of exchange controls regulating access of domestic investors to foreign securities markets. Eurobond issuing houses quickly identified the potential and established new markets of onshore investors to the benefit of international issuers. The definition of the Eurobond market is thus no longer an issue. From having been a market for anonymous offshore investors, the target audience is only limited by the creative nature of the issuing houses. 2.B Characteristics of Eurobonds The first Euromarket was the market for short-term USD deposits and USD loans. This market is called the Eurodollar market, which is a segment of the Eurocurrency market. The Eurocurrency market rapidly became a broader market, including different currencies. The Eurocurrency market for short-term deposits (Eurodeposits) rapidly became a reference market for domestic marketmakers. For example, several domestic instruments started to be priced taking the interest rate on Eurodeposits as the relevant discount rate. The Eurocurrency market is a money market for short-term funds. Most of the assets and liabilities are of less than one year's maturity. For medium or long-term funds the main market is the Eurobond Market. A Eurobond is an international debt security and its structure is similar to the standard debt security used in domestic bond markets. The basic characteristics are listed below: i. a Eurobond is a debt contract between a borrower and an investor, which records the borrower's obligation to pay interest and the principal amount of the bond on specified dates. ii. a Eurobond is transferable. iii. a Eurobond is intended to be tradeable. iv. a Eurobond is a medium- to long-term debt security. v. a Eurobond is generally launched through a public offering and listed on a stock exchange. It is a fundamental, and for all practical purposes essential, requirement of a Eurobond that it be transferable; and its transfer should be simple. Transferability can be achieved by a number of techniques, but two particular methods are generally used. These two methods are represented by the XII.13