Eurobonds Aren’t Necessarily from Europe
The term Eurobonds refers to bonds in one nation that are denominated in another nation’s currency. So a Japanese-currency bond owned in Canada and subject to Canadian interest rates would be a type of Eurobond even though it has nothing to do with Europe. Specifically, this particular bond would be called a Euroyen bond because it’s a Eurobond denominated in the Japanese yen.
Similarly, Eurobonds have the same basic function as a traditional bond in a given nation, but they incorporate elements of other nations in that they’re denominated in a foreign currency.
To reference the original meaning of the term Euro, junk Euro-bonds are called Euro Junk (a nod to Euro Trash opera).
So why do people like Eurobonds? Although Eurobonds don’t typically pay better interest rates than other bonds, they do allow investors to earn money on fluctuations in exchange rates as well as on interest.
Pretend for a moment that you’re a college student in the U.S. with $10,000 to invest. You can earn 5 percent on a traditional treasury bond, or you can earn 5 percent on a British pound Eurobond plus any speculative earnings that you’d make should the British pound increase in value compared to the U.S. dollar.
If the exchange rate changes so that the pound is 1 percent more valuable than it was before you invested, then you’d make 6 percent on a 5 percent bond. Of course, you’re also taking a big risk since the exchange rate fluctuation could just as easily go the other way.