16.2. INTERNATIONAL BOND & COMMERCIAL-PAPER MARKETS 617
the principal in another currency.
DoItYourself problem 16.4
Suppose that the holder of a five-year bond receives an annual coupon ofusd 500
and can choose to receive at maturity eitherusd10,000 oreur10,000. Taking the
usdas home currency, you can describe this bond in two ways, one involving a put
and one involving a call. Find these two descriptions, and link them via Put-Call
Parity.
Stripped bondsBond stripping essentially means that the coupons and the prin-
cipal components of the bond are sold separately. If bonds are actual pieces of
paper made out to bearer, you can strip bonds at home with a pair of scissors: just
clip off all of the remaining coupons, and sell them separately from the mantle, the
piece that stands for the principal. On a larger scale, and especially when bonds are
registered rather than bearer securities, stripping is done by buying coupon bonds,
placing them into an incorporated mutual fund or a trust, and issuing separate
claims against this portfolio, representing either the coupons or the principal.
The main consequence of stripping is that the principal can be sold separately,
as a zero-coupon bond. One motivation for stripping is that immunisation and
asset/liability management are simplified if there are zero-coupon instruments for
many maturities. Also, zero-coupon bonds, offering capital gains rather than in-
terest, get favorable tax treatment in many countries. In some countries, including
Japan and Italy, capital gains are often partially exempt from personal taxation.
Thus, the principal is sold toe.g. Japanese or Italian investors, and the (taxable)
coupons are sold to low-tax investors.
Issuing procedures (1): the consortiumPlacement of eurobonds is most often
through a syndicate of banks or security houses.
- Thebook runner (formerly calledlead bank orlead manager) negotiates with
the borrower, brings the syndicate together, makes a market (at least initially),
and supports the price during and immediately after the selling period. Book
runnership can be shared by a group. - There are often, but not always,managing banksthat underwrite the issue and
often buy part of the bonds for their own account. - Theplacing agentscall their clients (institutional investors or individuals) and
sell the bonds on a commission basis.
Just like in the case of bonds, there is creeping title inflation. More and more
often the underwriters are called lead managers, and the term co-managers then
refers to firms that just distribute the paper (the placing agents of old). - Thefiscal agenttakes care of withholding taxes, while thetrustee bankmonitors
the bond contract (if any such contract exists; most bonds are unsecured and do
not have bonding clauses).