In brief define each of the major types of international bond market instruments, noting their distinguishing characteristics.
The major kind of international bond instruments & their distinguishing characteristics are as follows:
Straight fixed-rate bond issues contain a designated maturity date on which the principal of the bond issue is promised to be repaid. Throughout the life of the bond, fixed coupon payments that are some percentage rate of the face value are paid as interest to the bondholders. It is the major international bond type. Straight fixed-rate Eurobonds are classically bearer bonds & pay coupon interest annually.
Typically Floating-rate notes (FRNs) are medium-term bonds along with their coupon payments indexed to some reference rate. Common reference rates are either three-month or six-month U.S. dollar LIBOR. Usually Coupon payments on FRNs are quarterly or semi-annual, and in accord with the reference rate.
A convertible bond issue let the investor to exchange the bond for pre-determined number of equity shares of the issuer. The floor value of convertible bond is its straight fixed-rate bond value. Convertibles typically sell at a premium above the larger of their straight debt value and their conversion value. In addition, investors are usually eager to accept a lower coupon rate of interest than the comparable straight fixed coupon bond rate since they determine the call feature attractive. Bonds along with equity warrants can be viewed as a straight fixed-rate bond with the addition of a call option (or warrant) feature. The warrant entitles the bondholder to purchase a certain number of equity shares in the issuer at a pre-stated price over a pre-determined period of time.
Zero coupon bonds are sold at a discount from face value & do not pay any coupon interest during their life. At maturity the investor attains the full face value. Another type of zero coupon bonds is stripped bonds. A stripped bond is a zero coupon bonds those results from stripping the coupons and principal from a coupon bond. The result is series of zero coupon bonds show by the individual coupon & principal payments.
A dual currency bond is straight fixed-rate bond that is issued in one currency & pays coupon interest in that similar currency. At maturity, the principal is repaid in a second currency. Coupon interest is frequently at a higher rate than comparable straight fixed-rate bonds. The amount of the dollar principal repayment at maturity is set at inception; often, the amount allows for some appreciation in the exchange rate of the stronger currency. From the investor’s perspective, a dual currency bond comprises a long-term forward contract.
Composite currency bonds are denominated into a currency basket, such like SDRs or ECUs, rather than a single currency. They are often called currency cocktail bonds. Typically they are straight fixed-rate bonds. The currency composite is a portfolio of currencies: while some currencies are depreciating others may be appreciating, therefore yielding lower variability overall.