Everyone has likely heard of eurobonds from market analysis or news releases. What exactly are eurobonds, where can you find them, and how can you profit from them? Today, Fortraders experts will explain what eurobonds are in simple terms.
What Are Eurobonds?
For example, Rosneft’s debt obligations issued in dollars would be considered eurobonds, while for Apple, eurobonds would be bonds denominated in, say, Chinese yuan.
Where did the ‘euro‘ prefix in the name come from? It owes to Italy, where eurobonds first appeared in 1963. Since this type of debt instrument is now widespread worldwide, the geographical reference to Europe, hidden in the ‘euro’ prefix, has lost its meaning and is used only due to tradition.
How Do Eurobonds Work?
For instance, a state or company, which we will call the issuer, plans to finance current or future projects, expand its operations, or simply address a financial issue. To do this, the issuer raises borrowed funds. To attract these funds, the company or country issues eurobonds.
The company periodically pays interest on the loan, which is known in advance. After the loan period ends, the company returns the full amount borrowed to the investor.
Like other debt instruments, eurobonds have the same set of key parameters:
- Face value – this is the price at which the security was issued.
- Coupon income – a fixed amount that the holder of a eurobond receives per bond per year.
- Maturity date – this is the date until which the investor will receive coupon income, after which the company will return the face value of the eurobond. This parameter is also called the life of the bond.
- Market price – since bonds are securities, they are traded on the market. Therefore, the market price is the current price of the bond on the market. It depends on the demand for eurobonds and can be either higher or lower than the face value. It should be noted that the size of the coupon income remains constant and is independent of the market price of the bond.
- Current yield – the size of annual profit depending on the bond’s market price, expressed as a percentage.
- Yield to maturity – the average annual profit, expressed as a percentage, that the bondholder will receive after the end of the bond’s life.
Example
For example, the face value of one Rosneft eurobond is $1,000. The coupon income is 4.2% annually. That means an investor who buys one bond will receive $42 each year.
Rosneft is one of the key companies in Russia’s oil and gas sector, so its securities are in demand. Therefore, as demand increases, the market price of Rosneft eurobonds also rises. Despite this, the coupon income will still be $42 per year, even if the market price of the bonds increases.
If the market price of the bond increases, but the coupon income remains constant, something must decrease. That will be the profit expressed as a percentage. In other words, an investor buying eurobonds at a price above the face value invests more money, and the return on the invested money will be less. Buying a Rosneft eurobond for $1,200, an investor will get $42 per year, but the yield will be 3.5% instead of the original 4.2% annually.
However, if the maturity date of the eurobond was 10 years, the investor would get a profit: $1,000 (face value) + $420 (coupon income over 10 years) – $1,200 (market price) = $220.
Where to Find Information About Eurobonds
All information about eurobonds traded on the Moscow Exchange can be found on the official exchange website in the section “Stock Market – Instruments – Bonds”.
For each instrument, it is possible to view all key parameters, after which the investor just needs to choose suitable eurobonds.
For example, here is what the information about Rosneft’s eurobonds RosNef-22 looks like:
How to make money and what profit can be obtained from eurobonds
As with stocks, profit from eurobonds can be made in two ways:
- Hold eurobonds – this is the simplest way. The bondholder periodically receives a fixed coupon income.
- Trade eurobonds – this is a speculative way. Like with any other stock market asset, profit is formed due to changes in the price of eurobonds on the market.
Which eurobonds will be the most profitable? The yield of eurobonds mainly depends on who issues them. More precisely, the higher the credit rating of the issuer, the lower the yield on its eurobonds.
Issuers whose credit rating is not reliable are forced to attract investors by adding a risk premium to the coupon payments, which increases their size.
In general, this situation fully fits the scheme “The less the risk, the less the profit,” which is characteristic of any stock market asset.
The most reliable eurobonds are government bonds, since the state has a high credit rating, and bonds of the largest companies in their respective fields. The coupon yield of their eurobonds is relatively low, around 2-3%, but reliability is beyond doubt. Less reliable companies or countries offer high coupon yields, 10% and above, along with high risks.
The yield of eurobonds also depends on the maturity period. Usually, the longer the life of the bond, the higher its yield.
How Much Do Eurobonds Cost?
The minimum price of one eurobond is $1,000. Like on the foreign exchange market, many eurobonds are traded not individually, but in trading lots. One lot may contain between 100 and 200 bonds, which corresponds to a trading lot value of $100,000 to $200,000.
To make the purchase of eurobonds accessible to as many investors as possible, the Moscow Exchange allowed in 2015 to split trading lots into parts.
Where Can You Buy Eurobonds?
Eurobonds, as we have already mentioned, are a stock market asset and are traded on the Moscow Exchange. They are available for purchase by individual investors, but only through an intermediary, who acts as a broker.
A regular investor can buy eurobonds in three ways:
- on their own – for this, a sum of at least $1,000 is required;</li
FAQ
What are eurobonds?
Eurobonds are debt securities denominated in a currency different from the issuer’s home country, such as bonds issued by a Russian company in U.S. dollars.
How do eurobonds work?
Investors lend money to an issuer, who pays fixed interest (coupon) periodically and returns the face value at maturity. The market price of the bond can fluctuate based on demand.
Where can I buy eurobonds?
Eurobonds are traded on stock exchanges like the Moscow Exchange and can be purchased through a broker, with minimum investments starting at $1,000.
