You are an investment banker advising a Eurobank regarding a new international bond offering it is considering. The proceeds are to be utilized to fund Eurodollar loans to bank clients. What sort of bond instrument would you suggested that the bank consider issuing? Why?
As the Eurobank desires to employ the bond proceeds to finance Eurodollar loans that are floating-rate loans, the investment banker must recommend that the bank issue FRNs that are a variable rate instrument. Thus there will a correspondence between the interest rate the bank pays for funds and the interest rate it receives from its loans. For instance, if the bank frequently makes term loans at indexed to 3-month LIBOR, it might want to issue FRNs, also, indexed to 3-month LIBOR.