What is a Eurobond, and how does it help raise international capital?

A Eurobond is a type of loan, similar to borrowing money, that a government or business obtains from another nation and repays in a different currency. An Indian company, for example, might take out a loan in Japan and repay it in US dollars.

Example:

Manish, a businessman from India, wants to expand his toy factory. He needs money but doesn’t want to borrow in rupees. Instead, he borrows $1,00,000 (₹83,00,000) from investors in Europe and promises to pay them back in US dollars, not rupees. This is a Eurobond!

Businesses can borrow money in stronger currencies from around the world with Eurobonds. Manish's example shows how rupee risks are avoided. This article explains what a Eurobond is.

How Do Eurobonds Help Raise International Capital?

Eurobonds enable governments and businesses to borrow funds in a different currency from foreign investors. They encourage the purchase of large loans from around the globe at more favourable rates.

Simple Explanation:

Imagine Nitin, a businessman from India, wants to build a new factory. He needs ₹100 crores, but Indian banks charge high interest. Nitin issues a Eurobond in US dollars (USD) because:

• Foreign investors trust the USD more than the rupee.
   
• He receives a lower interest rate (5%) compared to Indian loans (8%).
   
• Investors from Europe, the Americas, and Japan buy his bonds, providing him with global funding.

Nitin raises $12 million (₹100 crores) and repays it in USD over a 10-year period.

Why Eurobonds Work for Raising Global Money
 

1. Bigger Investor Pool: More people worldwide can lend money.
    
2. Cheaper Loans: Borrow in stable currencies (USD, EUR) at lower rates.
    
3. Avoid Local Rules: Less paperwork than borrowing only in India.
    
4. Match Foreign Earnings: If Nitin sells products in USD, he repays debt in the same currency.

Read More : What Is Corporate Bond 
 

Example Table:

Here’s a simple breakdown of how Nitin’s Eurobond works:
 

This table illustrates how Eurobonds facilitate connections between borrowers like Nitin and global lenders.

Eurobonds make it affordable and straightforward for governments and corporations to borrow money from foreign investors. Nitin's example shows how taking out a USD loan can be more advantageous than a local loan. 

Types of Eurobonds

Eurobonds are available in various forms, each tailored to meet the unique requirements of investors and borrowers. They assist governments and businesses in raising capital in ways that meet their budgetary objectives.

Also Read : What is the ex-dividend
 

Simple Example:

To grow his company internationally, Aman, an Indian tech entrepreneur, is looking to raise 500 crores. He investigates various Eurobond options rather than obtaining a standard bank loan:

1. Fixed-Rate Bond: Pays the same interest every year (e.g., 6% on ₹500 crores).
    
2. Floating-Rate Bond: Interest rate changes with market rates (e.g., starting at 5%, then adjusting annually).
    
3. Zero-Coupon Bond: No yearly interest, but sold at a discount (e.g., bought back at ₹650 crores after 10 years).
    
4. Puttable Bond: Investors can return the bond early if needed.
    

Why Different Types Matter
 

• Fixed-rate = Predictable payments (suitable for stable companies).
   
• Floating-Rate = Better if interest rates might fall.
   
• Zero-Coupon = No yearly hassle, just one significant repayment.
   
• Puttable = Safer for nervous investors.
   

Example Table (Different Words Used)

Below is a breakdown of Aman’s Eurobond choices: