Discuss the advantages and disadvantages of euro bonds to borrowers and investors?

Answer 1

There are several advantages for companies to issue Eurobonds:

• Obtaining financing by issuing Eurobonds is often cheaper than obtaining a foreign currency bank loan.
• It is a way for companies to obtain financing in an economy where financing is hard to obtain. Issuing Eurobonds gives companies wider access to the international market which they may normally not be able to access.
• It gives companies the ability to raise funds without having to issue shares.
• Since Eurobonds are normally aimed at institutional investors and not the public, there are no advertisement costs involved and this therefore means lower costs for the issuing firm.
• Allows companies to obtain funds in a foreign currency to create a foreign currency liability to match against a foreign currency asset.

Against these advantages, there are some disadvantages to consider:

• there are issue costs to take into account
• if the debt is not matched against a foreign currency asset, the Eurobond issuing firm may be open to foreign exchange risk.

There are several benefits to an investor who does put its money into Eurobonds":

• The bonds give an investor a possibility of achieving a higher yield on investments as compare to investing in most shares, bank and building society accounts, money market placements, etc.
• It is a "safe" investment in the sense that the full value of the bond will be replayed when the bond matures.

As for disadvantages to the investor:

• Investing in a Eurobond is not a good idea for investors who may need a repayment of the investment at short notice.
• There is always the risk of the issuing company going under and the maturity value of the Eurobond not being paid.