International finance

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International finance

Transcript of International finance

  • 1. International Finance

2. World Financial Markets and Institutions

  • International Banking and Money Market
  • International Bond Market
  • International Equity Markets
  • Futures and Options on Foreign Exchange
  • Currency and Interest Rate Swaps
  • International Portfolio Investment

3. International Bond Market

  • Facts and figures
  • Foreign bonds and Eurobonds
  • Types of ________ securities
  • International debt securities: Currency, Nationality, and Type of Issuer
  • ________ ratings
  • Market structure
  • International Bond Market Indices

4. The Worlds Bond Markets

  • A statistical perspective:
    • Go to theBank of International Settlementsand view data on outstanding ________ of debt and equity securities.
    • In 2005, outstanding amounts of international debt securities was $14,615.9 billion, domestic debt securities B$44,991.7 billion. Data fromMorgan Stanley Capital Internationalshow that world market capitalization (World Index) was $1,257.78 billion in the end of 2005.
    • The total market ________ of the worlds bond markets is much larger than that of the world equity markets

5. Foreign bonds and Eurobonds

  • Foreign bond issued on a local market by a foreign borrower and usually denominated in local currency. Issue and trading supervised by local authorities.
    • Toyota issues $-denominated bonds in _________ market
  • Eurobond underwritten by a multinational syndicate of banks and placed mainly in countries other than the one in whose currency it is denominated.
    • KLM Royal Dutch issues a ________ denominated bond in ________
      • Types:
        • Bearer bonds
        • Registered bonds

6. Bearer Bonds and Registered Bonds

  • Bearer Bonds are bonds with no registered owner. As such they offer anonymity but they also offer the same risk of loss as currency.
  • Registered Bonds: the owners ________ is registered with the issuer.
  • Foreign bonds often have colourful names:
    • Yankee bonds are US $ denominated foreign bonds sold in the US;
    • Samuraibonds are Yen denominated foreign bonds________in________ ;
    • Bulldogsare pound sterling denominated foreign bonds sold in the UK.

7. National Security Regulations

  • Yankee bonds must meet the requirements of the ________, just like U.S. domestic bonds.
  • Many borrowers find this level of regulation burdensome and prefer to raise U.S. dollars in the ________ market.
  • Eurobonds sold in the primary market in the United States may not be sold to U.S. citizens.
  • Of course, a U.S. citizen could ________ a Eurobond on the secondary market.

8. Global Bonds

  • A global bondis a very large internationalbond offering bya single borrower that is simultaneously ________ in North America, Europe and Asia.
  • Mostly institutional investors are the purchasers so far.

9. Types of Instruments

  • Straight Fixed Rate Debt
  • Euro-medium term notes
  • Floating-Rate Notes
  • Equity-Related Bonds
  • Zero Coupon Bonds
  • Dual-Currency Bonds

10. Straight Fixed Rate Debt

  • These are plain vanilla ________ with a specified coupon rate and maturity and no options attached.
  • Since most Eurobonds are bearer bonds, coupon dates tend to be ________ rather than semi-annual.
  • The vast majority of new international bond offerings are straight fixed-rate issues.

11. Straight Fixed Rate Debt

  • Calculate the value of a 10-year 10% semi-annual coupon bond when yield to maturity for this type of bonds is r d =13%

12. Accrued interest

  • The full price of the bond equals the quoted price Q (clean price) plus accrued interest AI.

The clean price of a Eurobond is Q=95, the annual coupon is 6%, and we are exactly three months from the past coupon payment. What is the full price of the bond? 13. Floating-Rate Notes

  • Just like an ________rate mortgage.
  • Common reference rates are 3-month and 6-month U.S. dollar LIBOR
  • Since FRNs reset every 6 or 12 months, the premium or discount is usually quite smallas long as there is no change in the default risk.

14. Floating-Rate Notes

  • A FRN has the following coupon formula: 6-month LIBOR rate + 50 basis points with a cap of 7% and a floor of 5%. The coupon rate is reset every 6 month. Compute the coupon rates.

Reset Date LIBOR Coupon Rate Jan-02 5.5% Jul-02 5.8% Jan-03 6.3% Jul-03 6.8% Jan-04 7.3% Jul-04 3.7% Jan-05 2.5% 15. Floating-Rate Notes

  • An A-rated company issues a perpetual Eurodollar FRN. The FRN has a semi-annual coupon rate set at 6-month LIBOR plus a spread of 0.5%. Six months later, LIBOR is 6% and the default spread for A-rated bonds moved to 1%. What is the estimated value of the FRN on the reset date if we assume no further changes in LIBOR? (so-called freeze method).

16. Equity-Related Bonds

  • Convertibles
    • Convertible bonds allow the holder to ________ his bond in exchange for a specified number of shares in the firm of the issuer.
  • Bonds with equity warrants
    • These bonds allow the holder to ________ his bond but still buy a specified number of shares in the firm of the issuer at a specified price.
  • Value = Price of straight bond + Value of call option to convert into stock or to buy shares
  • Trade usually at________compared to straight bonds
  • Note : V callable bond= Price of straight bond - V call option

17. Zero Coupon Bonds

  • Sold at a ________ from face value because there is no cash flow until maturity.
  • In the U.S., investors in zeros owe taxes on the imputed income represented by the increase in present value each year, while in Japan, the gain is a tax-free capital gain.
  • Pricing is very straightforward:

18. Implied Forward Exchange Rate

  • Term structure of interest rates________for every major currency
    • View term structures forUSA ,Japan ,Germany , other countries from Bloomberg.
    • Using yields on zero-coupon bonds with different maturities, we can calculate implied________exchange rates
    • Useful information in checking exchange rate forecasts (break-even analysis in international bond investing)
    • n-year implied forward rate is F n =S(1+r FC ) n /(1+r DC ) n

19. Implied Forward Exchange Rate 20. Return and Risk of Foreign Bonds

  • c current yield when you________the bond
  • FY change in the yield since you bought the bond
  • D bondduration
  • s - % change in the exchange rate, appreciation or depreciation of the________bond currency

21. Return and Risk of Foreign Bonds

  • A British investor just bought a US T-bond with duration of 10. The bonds yield is 5%. The next day, US term structure moves up by 0.05% and the $ depreciates by 1% relative to GBP. What is the approximate gain/loss in GBP?

22. Dual-Currency Bonds

  • A straight fixed-rate bond, with
    • interest paid in one currency, and
    • principal in another currency.
  • Japanese firms have been big issuers with coupons in yen and principal in dollars.
  • Good option for a MNC financing a foreign subsidiary.
    • Issuer:
    • Investor:

23. Dual-Currency Bonds

  • Nippon Kokan Kabushiki Kaisha (NKK) issues an 8% Dual Currency Yen/U.S. Dollar bond maturing in 10 years. Issue amount: JPY 20,000,000,000.Redemption amount at maturity: US$110,480,000. Current spot rate JPY/USD=181.02824. The yen yield curve is flat at 4% and $ yield curve is flat at 12%. What is the value of this bond?

24. Dual-Currency Bonds

  • What is YTM on this bond?

First, convert the principal into yen without calculating its present value. This can be done using forward rates. 10-year forward rate is F JPY/USD,10 =S JPY/USD *(1+i JPY ) 10 /(1+i $ ) 10 25. Characteristics of InternationalBond Market Instruments 26. International Bonds and Notes:Currency, Nationality, Issuers

  • Bonds issued in Canadian dollars represent less than 1% of world total

27. Distribution of International Bond Offerings by Nationality 28. Distribution of International Bond Offerings by Type of Issuer 29. Credit risk and credit ratings

  • A 1-year bond is issued by a corporation that has 1%