Page 254 - DMGT545_INTERNATIONAL_BUSINESS

Unit 13: Basics of International Accounting and Financial Management

6. A ................ loan requires the corporation to repay a predetermined portion of the loan at notes
regular intervals regardless of how much profit it is making.
7. A ................ market benefits both borrowers and investors.
8. Financial Services is an ................ industry.
9. ................ are deposits of US dollars in banks located outside the US.

13.1.5 international Bond and market credit ratings

The credit rating organisation classifies bond issue into categories based on creditworthiness of
the borrower. The ratings are based on analysis of current information regarding the likelihood
of default and specification of debt obligation. The rating only reflects the creditworthiness and
not exchange rate uncertainty. Fitch IBCA, Moody’s Investor service and Standard and Poors
(S&P) have for years provided credit ratings on domestic and international bonds. The rating
agencies have rating categories 9 to 11 out of which the first 4 are regarded as investment grade
ratings.
S&P also gives ratings for Sovereigns, Municipalities, Corporations, Utilities and Supranationals.
In rating a sovereign government, S&P analysis centres around an examination of the degree
of political risk and economic risk. In assessing political risk, S&P examines the stability of the
political system, the social environment and international relations with other countries. Factors
examined for assessing economic risk include the sovereign’s external financial position, balance
of payments flexibility, economic structure and growth, management of the economy, and
economic prospects. The ratings assigned to a sovereign are particularly important because it
usually represents the ceiling for rating. S&P will assign an obligation of an entity domiciled
within that country.

international Bonds market indexes

The investment-banking arm of J.P. Morgan Company provides some of the best international
bond market indexes that are frequently used for performance evaluation.

Did u know? J.P. Morgan publishes a domestic government index for 18 countries.

13.1.6 Global equity markets

Till 1970’s, International Capital Markets focused on debt financing and equity finance was raised
by corporate primarily in the domestic market due to the following:

lz Restrictions on cross border equity investments prevailing until then in many countries.
lz Investors also preferred to invest in domestic equity issues due to perceived risks in foreign
equity issue due to foreign currency exposure or apprehensions of restrictions on such
investments by the national authorities.
lz Early 1980’s because of liberalisation of many domestic economies, issue of dollar/foreign
currency denominated equity shares were allowed to access international equity markets
through the issue of an intermediate instrument called “Depository Receipts”.
A Depository Receipt (DR) is a negotiable certificate issued by a depository bank which represents
the beneficial investors in shares issued by a company. These shares are deposited with a local
“custodian” appointed by the depository, which issues receipts against the deposit of shares.
According to the placements planned, DR’s are referred to as (1) Global Depository Receipts
(GDRs) (2) American Depository Receipts (ADRs) (3) International Depository Receipts (IDR).

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