What Are Eurobonds?

As the world of business becomes more global, so does the world of finance. Companies now raise money -- debt and equity -- outside their own national borders and in foreign currencies, tapping investors for needed cash all around the world.

Eurobonds are one method of financing a company with foreign money. By definition, Eurobonds are bonds that are issued in a currency that is not the domestic currency of the issuer.

A bond issued by an U.S. company in Australia, denominated in Australian dollars, would be an example of a Eurobond, since the issuer's home currency is the U.S. dollar and Australia uses the Australian dollar. The name "Eurobond" broadly applies to bonds in foreign currency, regardless of the actual currency in which it is issued.

In recent history, some of the largest American companies have raised financing abroad to tap into lower interest rates around the world. Apple issued a Eurobond in 2014, raising 2.8 billion euros with two eight- and 12-year bond issues. Importantly, this bond would still be called a "Eurobond" if it were issued in British pounds, Swiss francs, or Japanese yen.

Why companies use EurobondsRaising debt financing abroad offers a number of benefits. For one, companies can often achieve lower interest rates by effectively "shopping around" for better interest rates in other currencies.

Additionally, multinational companies that generate profits globally can service a Eurobond without much added difficulty or currency risk. Apple generates a profit in euros in Europe, so paying interest on a bond denominated in euros isn't particularly challenging.

You also have to consider the needs of the investor. A London fund manager who oversees a pound-denominated portfolio might like the risk-reward ratio of Apple debt, but only if he or she can invest without exchange-rate risk. A pound-denominated Apple Eurobond would allow the fund manager to invest in Apple debt without worrying about exchange rates between the U.S. dollar and British pound.

Finally, Eurobonds are most commonly issued when the issuer does not have a particularly deep local debt market, or when the issuer's home currency is less attractive to investors. In 2015, the Lebanese government, which uses the Lebanese pound, issued a Eurobond in U.S. dollars, effectively opening itself to U.S. dollar-denominated investment from its own local institutions and international investors alike.

The article What Are Eurobonds? originally appeared on Fool.com.

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