Eurobonds - Explained

Eurobond is a fixed-income debt instrument that allows entities to raise funds in a foreign currency. It is usually a long-term bond ranging from 5 to 30 years. The word euro stands for the currency in which the bond is denominated and not euro currency in particular. A Eurobond denominated in US dollars is known as a euro-dollar bond, while one denominated in Chinese yuan is known as a euro-yuan bond.

What is Eurobond?

In 1963, Autostrade, a company involved in the development of railways in Italy, issued the inaugural Eurobond. It was crafted by London-based bankers and amounted to $15 million. The decision to denominate the bond in US dollars rather than Italian Lira was made with the goal of minimizing tax obligations.

How does Eurobond work?

A Eurobond is issued by organizations needing foreign currency-denominated debt at fixed interest rates. Financial institutions, governments, private entities, and global syndicates issue Eurobonds to reach more investors and avoid regulatory constraints. Borrowers typically issue these bonds through investment banks or other financial institutions, known as lead managers, who oversee the bond issuance and act as primary paying agents. A Eurobond can be issued in any country and currency other than the issuer's native currency. These bonds allow entities to raise capital in foreign currency at low-interest rates, making them highly liquid and attractive. Despite the prefix "euro," Eurobonds are not related to Europe or its currency. Their low face value makes them cheaper to buy.

Eurobond Example:, an Indian company wants to expand to foreign markets and plans to set up a factory in the US. For its expansion, the company would need to raise capital in the local currency, like US dollars. However, it cannot access credit in the US as it is a new entrant and lacks credit history there. So, the company would issue US-denominated Eurobonds to raise capital.

Who Issues Eurobonds?

• Big Borrowers: These are the instruments of borrowing for both governments and companies that need to raise money.

• Looking Abroad: They borrow money from investors at a global level, not just national.

• Foreign Currency: The twist? Eurobonds are issued in a currency different from that where the issuer's home country holds. This could be US dollars, Euros, or another strong currency.

• Why do it: There are benefits! A company might wish to borrow internationally if it can obtain a better interest rate or avoid some taxes.

Advantages of a Eurobond

Disadvantages of a Eurobond

A Eurobond has certain disadvantages too that are as follows:

No domestic regulation:

A Eurobond is not regulated in the home country, which makes it riskier compared to other debt instruments.

Foreign exchange risks:

As Eurobonds are issued in different countries, they are vulnerable to political or economic risks of each country. They are also vulnerable to exchange rate fluctuations making them riskier than rupee-denominated masala bonds.

High trading costs:

The trading costs of Eurobond are usually higher, and there is a need for a broker.

Indian companies who have issued Eurobonds

As a strategy to diversify exposure to foreign markets and currencies, many Indian companies issued Eurobonds, including Bharti Airtel Limited, ONGC Videsh Ltd, Bharat Petroleum Corp Ltd, Tata International Ltd, Rolta Ltd, etc.

Difference between a Eurobond and a Masala bond

A Eurobond and masala bond is issued outside the native countries, but both are different from each other. A Eurobond is issued in a currency non-native to the issuer’s country, whereas a masala bond is a rupee-denominated bond issued by an Indian company abroad. In other words, the masala bond allows the bond issuer to raise funds from overseas investors in local currency, while Eurobond is issued in a currency other than the issuer’s local currency. In a masala bond, the borrower doesn’t have to worry about rupee depreciation and it involves no currency risk.

Final word

Now you know what is Eurobond and how it works. The external bond is an effective debt instrument that helps investors diversify their portfolios and reduce risks arising from a single currency, country, or asset. A Eurobond is available on global stock exchanges and can be purchased like a regular bond. However, while investing in a Eurobond, one must remember that the instrument is not completely risk-free and can be volatile at times. So, before investing in this type of external bond, the investors should research and evaluate the risks on mutual fund app when they are associated with the investment.

Eurobonds FAQs

Are Eurobonds good?

Eurobonds can be good for investors looking to diversify and potentially earn foreign currency. They offer a chance to spread risk and may have lower fees. But remember, any investment has risks, so research before you buy.

What is the difference between Eurobond and Eurodollar?

A Eurobond can be in any currency, but a Eurodollar bond is specifically a Eurobond issued in US dollars. So, think of Eurodollar as a type of Eurobond, just like Euroyen bonds are yen-based Eurobonds.

Indian companies who have issued Eurobonds?

A number of Indian firms have invested in the Eurobond market for raising funds. Examples include Bharti Airtel, Reliance Industries, and Tata Motors. It is normally denominated in US dollars only for a wider reach of investors or at better interest rates.