Page 253 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes Another form of zero coupon bond is stripped bonds. A stripped bond is a zero coupon bond that
results from stripping the coupon and principal from a coupon bond. The result is a series of zero
coupon bonds represented by individual coupon and principal payments.

Dual Currency Bond

A dual currency bond is a straight fixed rate bond issued in one currency say Swiss franc that
pays coupon interest in the same currency. At maturity the principal is repaid in another currency
say US dollars. Coupon interest is frequently at a higher rate than comparable straight fixed rate
bonds. The amount of the dollar principal repayment at maturity is set at inception, the amount
allows for same appreciation in the exchange rate of a stronger currency. From the investor’s
perspective, a dual currency bond includes a long-term forward contract. If the dollar appreciates
over the life of the bond, the principal repayment will be worth more than the payment of the
principal in Swiss francs. The market value of a dual currency bond in Swiss francs should equal
the sum of the present value of the Swiss francs coupon stream discounted at the Swiss market
rate of interest plus the dollar principal repayment, converted to Swiss francs at expected future
exchange rate and discounted at the Swiss market rate of interest.

Corporate Currency Bonds

Corporate currency bonds are denominated in a currency basket. They are frequently called
currency cocktail bonds. They are basically straight fixed rate bonds. A composite currency bond
is an attractive type of financing for MNCs with sales receipts in a variety of currencies. From the
international investors’ standpoint, currency cocktail bonds are likely to have less exchange rate
risk than bonds denominated in a single currency.
Summary of the typical characteristics of the international bond market instruments:

investment frequency of interest payment Pay off at maturity
Straight fixed rate Annual Currency of issue
Floating rate note Quarterly or semi annual Currency of issue
Convertible bond Annual Currency of issue or conversion to equity
shares
Straight fixed rate with Annual Currency of issue plus equity shares
equity warrants from exercise of warrants
Zero coupon bonds None Currency of issue
Dual currency bond Annual Dual currency
Composite currency bond Annual Composite currency of issue

self assessment

Fill in the blanks:
1. ................ with equity warranty: can be viewed as straight fixed rate bonds with the addition
of a call option (or warrant) feature.
2. The ................ entitles the bond holder to purchase a certain number of equity shares of a
pre stated price over a predetermined period of time.
3. ................ approach caters to segments within countries.
4. ................ banks perform an indirect connection function.
5. ................- loans to corporations are either equity loans or debt loans.

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