FINS3616 · International Business Finance
International Financing and the Euromarkets
Week 7 of UNSW FINS3616 examines how MNCs raise capital across national capital markets (Shapiro Ch 11) and the structure of the Euromarkets — Eurocurrencies, Eurobonds and Euro-equity (Shapiro Ch 12). It covers why capital-market integration lowers the cost of capital, Eurobond pricing and yields, and why firms tap offshore markets. Weeks 7–10 carry increased weight on the 40% final exam, and this chapter links financing choice to the cost of capital developed in Week 8.
What this chapter covers
- 01Cost and availability of capital: integration lowers the cost of capital and relaxes the domestic-savings constraint; segmentation keeps costs higher
- 02Financing sources: domestic bonds/equity, foreign bonds, Eurobonds, Euro-equity, bank loans, and cross-listing to broaden the shareholder base
- 03Eurocurrency: a bank deposit in a currency held OUTSIDE that currency's home country (e.g. Eurodollars); unrelated to the euro currency
- 04Eurobond vs foreign bond: a Eurobond is sold outside the country of its denomination currency; a foreign bond (Yankee/Bulldog/Samurai) is sold in a domestic market by a foreign borrower in that market's currency
- 05Why Euromarkets exist: largely free of domestic reserve requirements/regulation, allowing narrower deposit-loan spreads
- 06Eurobond pricing: price = PV of coupons + PV of face at the market yield; premium when coupon > yield, discount when coupon < yield
- 07The term structure of interest rates and reference rates (historically LIBOR, now SOFR/risk-free rates)
- 08Globalisation of markets lowering the marginal cost of capital for firms with access
Pricing a Eurodollar bond from its yield
- +1Set up the valuation: a Eurobond is a straight bond, so price = PV of coupons + PV of face at the market yield. Here the annual coupon = 6% × $1,000 = $60, the face is $1,000, the yield is 5%, and there are 3 years.
- +1PV of the three coupons = 60/1.05 + 60/1.05² + 60/1.05³ = 57.14 + 54.42 + 51.83 = $163.39.
- +1PV of the face = 1,000/1.05³ = 1,000/1.157625 = $863.84.
- +1Price = 163.39 + 863.84 = $1,027.23. It trades at a PREMIUM (above par) because the 6% coupon exceeds the 5% market yield — investors pay more than face to receive the above-market coupon. Tapping the Euromarket can let an issuer reach offshore investors at a lower all-in yield than the domestic market.
Key terms
- Capital-market integration vs segmentation
- In integrated markets capital flows freely across borders, lowering the cost of capital and relaxing the constraint that domestic savings limit domestic investment. Segmentation — from controls, taxes or information barriers — keeps a market's cost of capital higher than the world level.
- Eurocurrency
- A bank deposit denominated in a currency held outside that currency's home country — for example Eurodollars are US-dollar deposits held outside the United States. It is a location concept and is unrelated to the euro currency.
- Eurobond
- A bond sold outside the country of the currency in which it is denominated (typically bearer form and lightly regulated). Contrast with a foreign bond, which is sold in a domestic market by a foreign borrower in that market's currency.
- Foreign bond
- A bond issued by a foreign borrower in a host country's domestic market and currency — nicknamed by market (Yankee bonds in the US, Bulldog in the UK, Samurai in Japan). It is regulated by the host market, unlike a Eurobond.
- Bond price–yield relationship
- A bond's price is the present value of its coupons and face at the market yield. Price moves inversely to yield; the bond trades at a premium when the coupon exceeds the yield, at a discount when the coupon is below the yield, and at par when they are equal.
- Reference rate (LIBOR/SOFR)
- The benchmark floating rate on which Eurocurrency loans and floating-rate notes are set. Historically LIBOR; now overnight risk-free rates such as SOFR. Euromarket spreads over the reference rate are narrow because of light regulation.
International Financing and the Euromarkets FAQ
What is the difference between a Eurobond and a foreign bond?
It is about where the bond is sold relative to its currency. A Eurobond is denominated in one currency but sold outside that currency's home country — for example a US-dollar bond sold to investors across Europe and Asia — and it is typically bearer form and lightly regulated. A foreign bond is sold inside a single domestic market, in that market's currency, by a foreign borrower, and it is regulated by the host country (Yankee bonds in the US, Samurai in Japan, Bulldog in the UK). The 'Euro' prefix means offshore, not the euro currency.
Why do the Euromarkets exist and why are their spreads narrow?
Because Eurocurrency deposits and Eurobonds sit outside domestic regulation, they escape reserve requirements, deposit insurance levies and much of the disclosure regime that apply onshore. That lower regulatory cost lets banks quote a narrower spread between deposit and loan rates than in the domestic market, and lets issuers borrow at competitive all-in yields. The result is a large, efficient offshore market that MNCs tap to lower their marginal cost of capital when they have access.
How does tapping global capital markets lower a firm's cost of capital?
When markets are integrated rather than segmented, a firm is no longer limited to domestic savings and a domestic required return; it can reach a much larger global pool of investors who price its risk against a world portfolio. Cross-listing shares, issuing Eurobonds and borrowing in the Euromarkets all broaden the investor base and can lower the required return. Integration relaxes the constraint that domestic investment is capped by domestic saving, so firms with genuine market access enjoy a lower marginal cost of capital — the link this chapter hands to the Week 8 cost-of-capital material.
Can AI help me with international financing and the Euromarkets in FINS3616?
Yes. Sia is an AI tutor built to mirror how FINS3616 is taught and assessed at UNSW Sydney: it can walk you through pricing a Eurobond from its yield, explain the Eurobond-versus-foreign-bond distinction, and lay out why integration lowers the cost of capital, step by step. It checks your reasoning but does not do graded assessment, and UNSW academic-integrity rules apply — Weeks 7–10 carry extra weight on the 40% final, so use it to prepare.
Exam move
Split this chapter into one clean calculation and a set of crisp definitions. For the calculation, drill Eurobond pricing until it is automatic — price = PV of coupons + PV of face at the market yield — and always run the instant premium/discount/par check (coupon vs yield) as a sanity test on your arithmetic. For the concepts, build a two-column comparison of Eurobond versus foreign bond and of integration versus segmentation, and be able to define Eurocurrency correctly (an offshore deposit, nothing to do with the euro). Know why Euromarkets carry narrow spreads (light regulation) and how integration lowers the marginal cost of capital, because that is the bridge to Week 8. Weeks 7–10 are flagged for increased weight on the cumulative 40% final exam, so rehearse both the bond-pricing question and the definitional short-answers on the recorded tutorial questions under time. When the price–yield direction won't click, ask Sia to re-price the bond at a yield above and below the coupon so you see it swing between discount and premium.
Working through International Financing and the Euromarkets in FINS3616? Sia is AskSia’s AI Business and Economics tutor — ask any FINS3616 International Financing and the Euromarkets question and get a clear, step-by-step explanation grounded in how FINS3616 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
