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.

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.

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.
    
5. Convertible Bond: Can be exchanged for company shares at a later date.

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.
   
• Convertible = Rewards investors if the company's value increases.

Example Table (Different Words Used)

Below is a breakdown of Aman’s Eurobond choices:
 

This table shows how each Eurobond type fits different needs.

Eurobonds provide flexible international borrowing options. Choosing the appropriate type (fixed, floating, zero-coupon, etc.) can save money or attract investors, as shown by Aman's example. You can quickly compare the main differences using this table.
 

Conclusion

Eurobonds are unique international loans that enable governments and corporations to borrow funds from investors worldwide. They are available in various forms, including those with variable interest rates, fixed interest rates, and even the potential to become company shares. 

For instance, Aman can select the Eurobond that best suits his requirements, such as consistent payments or flexible options, if he wishes to grow his tech company. Raising large sums of money internationally is made simpler and less expensive by these bonds. 

Anyone can see how businesses expand internationally through wise borrowing by understanding Eurobonds. It all comes down to selecting the appropriate financial instrument for the task.

FAQs

Are Eurobonds safe to invest in?

It depends; strong companies or governments are safer, but riskier borrowers may offer higher returns.

Can small investors buy Eurobonds?

Usually, no; they’re primarily for large investors, such as banks and funds, due to the high costs.

How do companies pay back Eurobonds?

They repay the borrowed amount plus interest over time, just like a standard loan.

What happens if a company can’t repay its Eurobond?

It’s called a default; investors may lose money unless there’s a backup plan.

Why would a company choose a convertible Eurobond?

Because investors can later convert it into company shares, which can be attractive if the business grows.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?