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Introduction
despite considerable growth, domestic debt markets in the emerging economies remain small compared to industrial countries. The main forces underlying the growth of emerging debt markets have been public sector deficits associated with fiscal adjustment and related banking and corporate sector reforms. There has been much less success in developing corporate bond markets. While banks on average hold the largest proportion of bonds in domestic markets. institutional investors have become key holders of domestic debt securities in both Latin America and central Europe.
1994 Asia Percentage of GDP Latin America Percentage of GDP 3 Other Percentage of GDP Total Percentage of GDP 494 26 316 22 158 24 968 24
2000 14 32 24 21
13 17 13 14
Bond issuance
Over 19942000, emerging market debt issuance amounted to $2.2 trillion, on average $300 billion a year. Latin America accounted for one half of total issuance, and Asia for the bulk of private sector issuance. Central Europe and South Africa lagged considerably behind Latin America and Asia, in particular in terms of private sector issuance.
Total issued
37 4 173 16 37 20 247
11
922
1,092
189
2,203
Withholding Taxes
Prior to 1984, the United States required a 30 percent withholding tax on interest paid to nonresidents who held U.S. government or U.S. corporate bonds. The repeal of this tax led to a substantial shift in the relative yields on U.S. government and Eurodollar bonds. This lends credence to the notion that market participants react to tax code changes.
Global bonds
A global bond is a very large international bond offering by a single borrower that is simultaneously sold in North America, Europe and Asia. Global bonds denominated in U.S. dollars and issued by U.S. corporations trade as Eurobonds overseas and domestic bonds in the U.S.
Types of Instruments
Straight Fixed Rate Debt Floating-Rate Notes Equity-Related Bonds Zero Coupon Bonds Dual-Currency Bonds Composite Currency Bonds
Floating-Rate Notes
Just like an adjustable rate mortgage. l Common reference rates are 3-month and 6month U.S. dollar LIBOR Since FRN reset every 6 or 12 months, the premium or discount is usually quite small as long as there is no change in the default risk.
Equity-Related Bonds
Convertibles
Convertible bonds allow the holder to surrender his bond in exchange for a specified number of shares in the firm of the issuer.
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.
Secondary Market
OTC market centered in London.
Comprised of market makers as well as brokers. Market makers and brokers are members of the International Securities Market Association (ISMA).
Clearing Procedures
Euroclear and Cedel handle most Eurobond trades.