616 CHAPTER 16. INTERNATIONAL FIXED-INCOME MARKETS
the balance sheet.
16.2.2 Institutional Aspects of the International Bond Market
We briefly describe some institutional aspects of the international bond market.
Bearer securitiesEurobonds are bearer bonds, that is, anonymously held rather
than held by investors listed in a register. In the old days, “bearer” actually meant
“made out to bearer”—actual pieces of paper, with coupons that can be clipped
off and cashed in by the holder. The principal of the bond was represented by the
mantle, the main part of the paper (after the coupons have been clipped off). In
many countries, an investor can cash in coupons and principal paid out by bearer
securities without having to reveal his or her identity to the bank that acts as paying
agent. In contrast, if the security had been a registered security, the issuer would
know the identity of the current holder of each bond, and pay interest by mailing a
check.usdomestic bonds are usually registered, nowadays. In theeu, even bearer
bonds tend to benon-deliverable nowadays, that is, not physical pieces of paper;
investors buy them electronically from intermediaries, but the issuer still does not
keep a register.
Interest paymentsEurobonds originally carried (and to a large extent still carry)
fixed coupons. Coupons are most often paid annually instead of every six months
(the domesticuspattern). Floating-rate notes (FRN) gained popularity when inter-
est rates rose, in the 1970s-80s, making many borrowers hesitant about long-term
fixed-rate bonds; when interest rates are low, in contrast, investors tend to be the
party that shuns fixed interest rates. In a floating-rate loan, the interest rate is
periodically reset on the basis of the then-prevailingLIBORfor that horizon plus a
preset spread. Sometimes, theFRNhas a cap or floor on the floating interest rate.
CappedFRNs are sometimes calledHIBObonds (higher-bound bonds), and floored
FRNsLOBObonds.PerpetualFRNswere briefly fashionable in the mid-eighties.
AmortizationAmortization of the bond’s principal amount typically occurs at
maturity. Such bonds are known asbullet bonds. Alternatively, the borrower may
undertake to buy back predetermined amounts of bonds in the open market every
year. This is called apurchase-fund provisionor asinking-fund provision. Under
a variant provision, the borrower does not have to buy back the bonds if market
prices are above par. Instead, the borrower has a right to call a predetermined part
of the issue every year.
Currency of denominationThe currency of denomination of the bonds is most
often a single currency (especially theusd,demor, now,eur,jpy, andchf). Also
the privateecugained some popularity as a currency of denomination in the early-
to-mid 1990s. Other currency baskets, such as theSDRor the European Unit of
Account, have never really caught on. Some bonds have currency options attached
to them. Such currency options bonds are discussed in Chapter 8. Occasionally,
you also see a dual currency bond, which pays out its coupons in one currency and