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October 2005 The Euromarkets II

MH BOUCHET (c) CERAM. 2. INTERNATIONAL FINANCE The Euromarkets: evolution, structure, instruments. Origins and developments Eurocredits and EurobondsLegal Clauses in SyndicationCapital adequacy guidelinesTax, accounting and regulatory framework. MH BOUCHET (c) CERAM. 3. INTERNATIONAL SECURITIES

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October 2005 The Euromarkets II

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    1. MH BOUCHET (c) CERAM 1 October 2005 The Euromarkets II INTERNATIONAL DEBT SECURITIES MARKET Michel Henry BOUCHET

    2. MH BOUCHET (c) CERAM 2 INTERNATIONAL FINANCE The Euromarkets: evolution, structure, instruments Origins and developments Eurocredits and Eurobonds Legal Clauses in Syndication Capital adequacy guidelines Tax, accounting and regulatory framework

    3. MH BOUCHET (c) CERAM 3 INTERNATIONAL SECURITIES and The EUROBOND MARKET Origins Development Structure Instruments Volume

    4. MH BOUCHET (c) CERAM 4 The Euromarkets: evolution, structure, instruments Preparation: Clark, Chap. 5, pp. 113-130 Madura: Chap. 3 Eiteman, Stonehil & Moffett, MBF, chapter 13 BIS Annual Report, Chap. VIII BIS Quarterly Review, Statistical Annex, December 2004 Bouchet: Credit Creation, Multiplication and Maturity transformation in the Euromarkets, USC, United States. Milton Friedman, The Euro-dollar Market, Federal Reserve Bank of Saint Louis, July 1971. ISMA Annual Report BIS Annual Report

    5. MH BOUCHET (c) CERAM 5 What is a Eurocurrency? Any freely convertible currency, such as a $ or a DM or �, deposited in a bank outside its country of origin. It is the residency of the bank and not its nationality that determines the �euro� nature of the deposit. Eurocurrency deposits are typically short-term deposits <1 year, whereas eurocredits are longer term, hence a maturity transformation in the Eurobanks� balance sheets.

    6. MH BOUCHET (c) CERAM 6 Bonds Contractual obligation on the part of the seller/issuer of the bond (the borrower) to pay a fixed amount per year for a set number of years to the buyer of the bond (the lender). At maturity, the borrower repays the original face value of the sum borrowed. Coupon= number of $ paid the lender per year Maturity= number of years over which the bond runs Par value= original sum borrowed Coupon rate= coupon expressed as a % of the par value

    7. MH BOUCHET (c) CERAM 7 Bonds Coupon, par value and coupon rate are invariant over the life of the bond. The coupon rate is established by competitive pricing in the market. The coupon rate is set so that the bond will be able to compete with comparable instruments in terms of maturity, yield, credit risk� The bond can be traded on the secondary market at a market price which depends on the current market rate of interest for that type of bond. When the market rate of interest fluctuates, the price of the bond will adjust in such a way that the ratio coupon/price will equal the current interest rate.

    8. MH BOUCHET (c) CERAM 8 Bonds P = M (1 + i) n M is bond value at maturity, P is present value, i is interest rate, n is number of years. There is an inverse relationship between bond prices and interest rates. For a given P, the higher i, the smaller M.

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