The international bond market provides borrowers with a source of medium to long-term funds. Borrowers include multinational corporations, domestic corporations, governments, and national as well as supranational financial institutions. It gives investors in the debt markets a way to diversify their portfolios over several different currencies.

The international bond market consists of two broad segments. They are Eurobonds and foreign bonds. International bonds are usually corporate bonds and they can offer portfolio diversification, but are highly subject to currency risk.

Eurobonds are bonds denominated in one or more currencies other than the currency of the country in which they are sold. Bonds denominated in a currency other than the Japanese yen and sold in Japan would be called Eurobonds.

Foreign bonds refer to bonds that are denominated in the currency of the country in which it is sold but issued by an entity from a foreign country. If a U.S. company were to sell Yen-denominated bonds in Japan, it would be classified as a foreign bond.

Because the issuer, as well as the currency of issue, are local, yen-denominated bonds issued in Japan by a Japanese company would be categorized as domestic bonds. A domestic bond is an obligation of a domestic issuer, denominated in domestic currency, and sold and traded in the domestic market.

The Eurobond market has grown much more rapidly than the foreign bond market for several reasons. These reasons include the following:

– Eurobond issues are not subject to the regulations of the country in whose currency they are denominated.
– They can be brought to the market quickly and with less disclosure. This gives the issuer of the bonds greater flexibility to take advantage of favorable market conditions.

In the case of registered securities, a record is maintained of the owners at any point in time by an entity known as a registrar or share transfer agent. Each time the security is transferred from one investor to another, the records are updated.

Foreign equity is traded in global markets in the form of depository receipts (DRs). The depositary receipt gives investors the opportunity to hold shares in the equity of foreign countries and gives them an alternative to trading on an international market.

Foreign equity is traded on the U.S. exchanges in the form of American depository receipts (ADRs). ADRs represent a feasible, liquid way for U.S. investors to purchase stock in companies abroad. Foreign firms also benefit from ADRs, as they make it easier to attract American investors and capital, without the hassle and expense of listing themselves on U.S. stock exchanges.

There are two broad categories of ADR programs. They are sponsored programs and unsponsored programs. ADRs are issued by depository banks outside the U.S. and trade just like shares on American stock exchanges in U.S. dollars. These securities trade on the over-the-counter market rather than on American stock exchanges.

Fungibility means the ability to interchange with an identical item. Fungible assets simplify the exchange and trade processes, as fungibility implies equal value between the assets.

The strategy of making costless, riskless profits by simultaneously transacting in two or more markets is referred to as arbitrage. Arbitrage is one of the fundamental principles underlying modern finance theory.

The term risk-averse describes the investor who chooses the preservation of capital over the potential for a higher-than-average return. One of the basic tenets of finance is the concept of risk aversion; that is, an investor will demand a risk premium for bearing a certain level of risk, and the higher the risk associated with an investment, the greater will be the premium demanded over and above the riskless rate of interest.

Although ADRs are the most common type of depository receipts, there are other similar securities called global depository receipts (GDRs). A GDR differs from an ADR in the sense that it is offered to investors in two or more markets outside the issuer’s home country. Most such issues will include a tranche for U.S. investors, as well as a separate tranche for international investors.

The risk that the price of the security at the time of purchase may be higher than its price at the point of a subsequent sale is referred to as market risk or price risk. It is the risk that there could be a capital loss for the investor. All marketable securities are subject to such risk.

An annuity is a series of payments made at equally spaced intervals of time. The income received from an annuity is taxed at regular income tax rates, not capital gains rates, which are usually lower.

Examples of level annuity include insurance premiums and monthly installments on housing loans and automobile loans, which are paid off by way of equal installments over a period of time.

If the first payment is made or received at the end of the first period, then we call it an ordinary annuity. Examples include a salary, which will be paid only after an employee completes his duties for the month, and house rent, which will be usually paid by the tenant only at the end of the month. The interval between successive payments is called the payment period.

The value of the shares that are currently being held by the investors is referred to as the outstanding capital. In the event of a company buying back shares from the public, the outstanding capital will decline and will be less than what was issued.

A firm will typically pay out a percentage of its earned profits during the financial year in the form of cash to its shareholders. Cash payouts that shareholders receive from the firm are referred to as dividends.

Economic systems are designed to collect savings in an economy and allocate the available resources efficiently to those who either seek funds for current consumption in excess of what their resources would permit or to invest in productive assets.

Money that can be immediately transferred from the buyer to the seller or from the lender to the borrower is referred to as federal funds. The term arose because, in the earlier years, the principal way of effecting an immediate fund transfer was by debiting the reserve account held by the lender at its regional Federal Reserve bank and crediting the reserve account maintained by the borrower at its regional Federal Reserve bank.

Depending on the relationship between the income earned and the expenditure incurred, an economic unit may be classified into one of the following three categories:

– A balanced budget unit.
– A surplus budget unit.
– A deficit budget unit.

Based on the original term to maturity of the financial claims that are traded, financial markets are classified into two types – the money market and capital market. The market in which instruments with one year or less to maturity are traded is called the money market, whereas the market in which medium to long-term instruments are traded is called a capital market.

The balance kept in a bank either in the form of approved securities or as cash is referred to as reserve. The bank cannot lend the money but must keep it in the vault, on-site or at the central bank, in order to meet any large and unexpected demand for withdrawals.

The lower the reserve ratio, the more money that will be available with the bank for commercial lending. The lower the reserve ratio, the higher will be the rates paid on deposits; and the lower the lending rates, for the larger the amount of funds available, the smaller the net interest margin that banks can afford to operate with.

After a trade has been matched by a trading system, a post-trade process called clearing and settlement needs to commence in order to ensure that the seller receives the cash that is due her, whereas the buyer receives the securities he has acquired. Clearing refers to all the post-trade processes other than the final settlement, where the term settlement refers to the payment of cash to the seller and transfer of ownership of the securities from the seller to the buyer.

The replacement of physical share certificates by electronic records is referred to as dematerialization. The introduction of dematerialization allowed for accounts to be updated automatically and swiftly.

An economic agent is an actor and more specifically a decision-maker in a model of some aspect of the economy. Economic agents are usually divided into three categories or sectors. They are as follows:

– Business
– Household
– Government

Open interest refers to the number of open positions at any point in time. Open interest may be measured as the total number of open long positions at a given point in time or, equivalently, as the total number of open short positions.