What are Eurobonds (Eurobonds)
Surely each of you has heard about Eurobonds from stock market analysis or just news releases. What are Eurobonds, where to find them and how to earn on them? Today the experts of Fortrader will tell you Eurobonds in simple terms.
What are Eurobonds?
Eurobonds are type of European bonds. In very simple terms, these are debt securities that are denominated in a currency that is foreign to the state or company that issues them.
For example, the debt obligations of Rosneft, issued in dollars, will be Eurobonds, and for Apple Eurobonds will be bonds denominated, for example, in Chinese yuan.
Where did the "euro" prefix come from in the name of the bonds? They owe it to Italy, where Eurobonds first appeared in 1963. Since this type of debt is now spread all over the world, the geographical reference to Europe, hidden in the prefix "euro", has lost its meaning and is used solely because of tradition.
How do Eurobonds work?
For example, the state or a company, which we will call an issuer, plans to finance current or prospective projects, expand its activities, or simply close some financial issue. To do this, the issuer raises borrowed funds. To attract them, the company or country makes an issue, that is, the issue of Eurobonds.
Investors buy these Eurobonds, thereby providing financial means to the issuer, in return receiving a fixed profit, which is paid, as a rule, once or twice a year.
Simply put, the investor lends the company his money.
For this, the company periodically pays him interest on the debt, which is known in advance. After the term of the loan expires, the company returns to the investor the entire amount borrowed.
Like other debt securities, Eurobonds have the same set of key parameters:
- Nominal value - is the price at which the paper is issued.
- Coupon income - a fixed amount received by the owner of a Eurobond per bond per year.
- Maturity date - is the date until which the investor will receive coupon income, and after which the company will return to him the nominal value of the Eurobond. This parameter is also called the life of the bond.
- Market price - Since bonds are securities, they are traded on the market. Accordingly, the market price is the current price of the bond in the market. It depends on the demand for Eurobonds and can be both higher and lower than the face value. It should be noted that the coupon rate is constant and does not depend on the market price of the bond.
- Current yield - is the amount of the annual profit, depending on the price of the bond in the market, expressed as a percentage.
- Yield to maturity - the average annual profit, expressed as a percentage, that the owner of the bond will receive after the end of its life.
Example
For example, the nominal price of one Rosneft Eurobond is $1,000. The coupon yield is 4.2% per year. That is, an investor who buys one bond will receive $42 each year.
Rosneft - one of the key companies in Russia's oil and gas sector, so its securities are in demand. Accordingly, the market price of Rosneft's Eurobonds grows as the demand grows. Even so, the coupon yield will still be $42 a year, even if the market price of the bonds goes up.
If the market price of a bond increases and the coupon income remains constant, something must decrease. And it will be a profit expressed as a percentage. That is, an investor buying Eurobonds at a price above par will invest more money, but the return on the money invested will be less. Having bought a Eurobond of Rosneft for $1200, the investor will receive $42 for a year, but the yield will be 3.5% per annum, not the initial 4.2%.
At the same time, if the maturity of Eurobonds was one year, the investor would receive: $ 42 (coupon income) + $ 1000 (face value) = $ 1042. As a result, if the market price of the Eurobonds is $1,200, the investor would be at a loss of: $1,200 (market price) - $1,042 (face value + coupon yield) = $158.
However, if the maturity period was 10 years, the investor would make a profit: $1,000 (face value) + $420 (coupon income over 10 years) - $1,200 (market price) = $220.
Where to get information about Eurobonds
All information about eurobonds traded on the Moscow Exchange can be found on the official website of the exchange at section "Stock Market - Instruments - Bonds".
For each instrument all the key parameters are available for viewing, after which the investor only has to choose the Eurobonds that are suitable for him.
For example, this is how the information about RosNef-22 Eurobonds of Rosneft looks like:
How to earn and what profit can be obtained from Eurobonds
Just like with stocks, you can get profit from Eurobonds in two ways:
- Ownership of Eurobonds - is the simplest way. The owner of the bond periodically receives a fixed coupon income.
- Eurobond trading - is a speculative way. As with any other exchange-traded asset, profits are generated by changes in the price of Eurobonds on the market.
However, there is a key difference between the stock market and the bond market, which makes speculative trading in Eurobonds not very profitable. The fact is that investors, the vast majority of which are investment companies, pension funds, etc., buy Eurobonds to get a coupon yield. Because of this, the debt market is characterized by very low volatility, which makes it difficult to trade on the difference of market quotations.
Thus, the main the way to profit from Eurobonds can be considered their acquisition before the end of the maturity date.
Which Eurobonds will be the most profitable? The profitability of Eurobonds primarily depends on who issues them. More precisely, the higher the issuer's credit rating, the lower the yield on its Eurobonds.
Issuers whose credit ratings are not reliable are forced to lure investors by introducing a risk premium to coupon payments, which increases their size.
In general, this picture is fully consistent with the scheme "The less risk, the less profit," which is characteristic of any stock assets.
The most reliable Eurobonds are considered to be government bondsThe government has a high credit rating, and bonds of the largest companies that are in the top in their fields. The coupon yields on their Eurobonds are relatively low, around 2-3%, but reliability is not in doubt. Less reliable companies or states offer high coupon yields, from 10% and above, along with which there are high risks.
Also, the yield of Eurobonds depends on their maturity. Most often, the longer the life of a bond, the higher its yield.
How much are Eurobonds worth?
What are Eurobonds
The minimum price per Eurobond is $1,000. Like on the foreign exchange market, many Eurobonds are traded in trading lots rather than pieces. One lot can include from 100 to 200 bonds, which corresponds to the value of a trading lot of $100,000-200,000.
In order to make the purchase of Eurobonds available to as many investors as possible, the Moscow Exchange in 2015 allowed trading lots to be split into parts.
Where can I buy Eurobonds?
Eurobonds, as we have already mentioned, are an exchange-traded asset and are traded on the Moscow Exchange. They are available for purchase by private investors, but only through an intermediary, which is a broker.
An ordinary investor can buy Eurobonds in three ways:
- on your own - this will require an amount of $1,000 or more;
- buying eurobond ETF shares - eurobond ETFs include securities of many top companies (Sberbank, Severstal, Rosneft, Gazprom etc.).
- unit purchase MUTUAL FUND - is a kind of analogue of an ETF.
To purchase a unit in a mutual fund, you need to enter into an agreement with the management company. To purchase Eurobonds or ETF shares directly, it is necessary to conclude an agreement with a broker and gain access to the stock exchange.
Each option is advantageous in its own way, taking into account the amount and timing of investment. However, you should keep in mind the intermediary services provided by the broker or management company. The commission will be charged not only for the purchase, but also for the annual service, which greatly affects the annual yield - the final figure can be very different from the initial one.
Bottom line
Buying Eurobonds is one of the safest ways to invest for ordinary investors who do not have exorbitant sums. Investing in Eurobonds, especially in times of economic instability, is quite profitable in both the long and short term.