Different Types of Bonds Overview Information

Different Types Of Bonds

Investment Management

Zohaib Hassan Shah

MB-09-084

Yankee Bond

According to the Securities Act of 1933, these bonds must first be registered with the Securities and Exchange Commission (SEC) before they can be sold. Yankee bonds are often issued in tranches and each offering can be as large as $1 billion. Yankee bond is publicly issued in the U.S. by foreign banks and corporations. Foreign issuers tend to prefer issuing Yankee bonds when U.S. interest rates are low because this means lower interest payments for the foreign issuer.

Yankee bond may take up to 14 weeks (or 3.5 months) to be offered to the public due to the stringent regulations and standards. Part of the process involves having debt-rating agencies evaluate the credit worthiness of the Yankee bond's underlying issuer.

Example:

For example, let's assume Company XYZ is headquartered in Spain. If Company XYZ issues bonds in the United States that are denominated in U.S. dollars, the bonds are Yankee bonds.

Like other bonds, Yankee bonds obligate the borrower to pay a certain interest rate and principal amount according to the terms of the indenture. Investors like Yankee bonds because they offer geographic and currency diversification as well as some tax advantages. Investors also get dollar income streams, which they might use to pay other dollar-denominated obligations.

• Sukuk Bond:

Sukuk bond is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. The issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.

Sukuk securities tend to be bought and held and, as a result, little of the securities enter the secondary market (allowing them to be traded). Furthermore, only public Sukuk are able to enter this market, as they are listed on stock exchanges. "Sukuk bonds" are designed to get around religious laws banning the payment of interest for money lending. Sukuk financing superficially resembles the similarly religious concept of interest-free loans.

• Euro Bond:

The word Eurobond was originally created by” Julius Strauss.”

A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. Eurobonds are named after the currency they are denominated in. For example, Euro-yen and Eurodollar bonds are denominated in Japanese yen and American dollars respectively. A Eurobond is normally a bearer bond, payable to the bearer. It is also free of withholding tax. The bank will pay the holder of the coupon the interest payment due. Usually, no official records are kept. It can be categorized according to the currency in which it is issued. London is one of the centers of the Eurobond market, but Eurobonds may be traded throughout the world - for example in Singapore or Tokyo.

The majority of Eurobonds are now owned in 'electronic' rather than physical form. The bonds are held and traded within the clearing systems. Coupons are paid electronically via the clearing systems to the holder of the Eurobond (or their nominee account).

 

• Foreign Bond:

We can define foreign bond as “A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency.” Foreign bonds are regulated by the domestic market authorities and are usually given nicknames that refer to the domestic market in which they are being offered. A foreign bond is most often issued by a foreign firm to raise capital in a domestic market that would be most interested in purchasing the firm's debt. For foreign firms doing a large amount of business in the domestic market, issuing foreign bonds is a common practice.

Types of foreign bonds:

Types of foreign bonds include:

•       Bulldog bonds
•       Matilda bonds
•       Samurai bonds

• Euro Dollar Deposits:

During the Cold War, Soviet-block nations often had to pay for imports with US dollars—or receive US dollars for their exports. They were loath to leave their dollar deposits with banks in the United States due to the risk of those deposits being frozen or seized. Instead, they started placing the deposits with European banks. Because they were US dollars held in Europe, the funds came to be known as Eurodollars, and the deposits were Eurodollar deposits. The banks started to lend those deposited dollars out. This was the beginning of the Eurodollar market.

We can define it as:

“A short-term certificate of deposit with a fixed interest rate issued in U.S. dollars outside the jurisdiction of the Federal Reserve. For example, one may purchase a CD in U.S. dollars and deposit it in a bank in the UK. Eurodollar deposits help persons and businesses hedge against short-term fluctuations in U.S. dollar exchange rates.”

The Eurodollar market has become global, so its name is a bit of a misnomer. A bank in Japan or Singapore may accept dollar deposits, but these are still called Eurodollar deposits. The market also includes other currencies, so there are Eurosterling, Euroyen, Euroswiss, etc.