Page 71 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes The various types of bonds for the general public, which have evolved over time, are listed
below:
(i) Deep Discount Convertibles: These are also known as Zero Coupon Convertible Bonds.
They are issued at a discount to the par value and mature at par value. Thus, they have no
or very low interest payments.

(ii) Bunny Bonds: These bonds permit investors to reinvest their interest income into more
such bonds with the same terms and conditions, thus compounding their earnings.
(iii) Bulldog Bonds: These are denominated in pounds sterling for UK investors by a non-UK
entity.
(iv) Yankee Bonds: These are dollar denominated issues, aimed at US investors, floated by a
non-US entity.
(v) Samurai Bonds: These are long-term domestic yen debt issues targeted at Japanese investors
by non-Japanese companies.

(vi) Dragon Bonds: These are issued in dollars, yen and other currencies, to lure Asian investors.
Apart from these, issuers can make their offerings more attractive through additional sweeteners
in the form of equity warrants, options, etc. Each new combination can be termed as a new
instrument.

Notes Indian companies are, however, not permitted to issue warrants along with their
Euro issues.

Characteristics of Euro Debt

The pricing of ECB loans is like the U-curve. For small loans (up to $3 million) the interest rates
are high. This is because of the high proportion of fixed costs towards clearing the loan proposal.
As the size of the loan increases to $15 to $18 million, the interest rates decline. In case of big
loans, they rise again due to the higher risk perception of the lender and larger syndication cost.
So, in case of small loans, the interest is fixed at about 50–100 basis points above LIBOR, while for
medium-size loans, they fall to 35–45 basis points above LIBOR, and rise again for large loans to
more than 100 basis points above LIBOR.

Self Assessment

Fill in the blanks:

14. …………………… are basically equity linked debt securities, which are converted to equity
or Depository Receipts after a specific period.
15. …………………… are issued at a discount to the par value and mature at par value. Thus,
they have no or very low interest payments.

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