Eurodollar Bond: What it is, How it Works

What Is a Eurodollar Bond?

A Eurodollar bond is a U.S.-dollar denominated bond issued by an overseas company and held in a foreign institution outside both the U.S. and the issuer's home country. Eurodollar bonds are an important source of capital for multinational companies and foreign governments alike. A Eurodollar bond is a dollar-denominated type of Eurobond.

Understanding Eurodollar Bonds

Don't let the name confuse you! Although the Eurodollar originated in London, the name today refers only to the history, not the currency, as these bonds are traded worldwide not only in Europe. Eurobonds are named after the currency they are denominated in. For example, Euroyen bonds are denominated in Japanese yen, and Eurodollar bonds are denominated in American dollars, respectively. The Eurodollar is a U.S. dollar-denominated bond sold by a non-American bank or corporation situated outside the U.S.

When a government or multinational firm decides to raise or borrow money for its financing needs from foreign investors, they can opt for Eurodollar bonds. For example, if a Chinese bank held dollar-denominated bonds issued by a Japanese company, this would be considered a Eurodollar bond. These time deposits allow buyers to take advantage of variations in currency exchange rates. Following our example, if the Chinese bank held the Eurodollar bond in a Japanese account denominated in U.S. dollars, it will earn interest on the bond, which will also be accrued in dollars. In effect, the bonds pay interest and principal in dollars held on deposit outside of the U.S. In addition to paying interest, most Eurodollar bonds have fixed maturities.

Special Considerations

Eurodollar bonds are advantageous because they are subject to fewer regulatory restrictions. The Federal Reserve Bank, which is the central bank that issues the US dollars, does not have any jurisdiction over the dollars because the bonds are issued and traded outside the U.S. This means that the bonds are not subject to any reserve requirements set by the Fed. Also, Eurodollars are not registered with the United States' Securities and Exchange Commission (SEC) and, thus, can be sold at slightly lower interest rates than in the U.S., allowing for increased flexibility, and creative structuring of financial instruments.

Eurobonds differ from foreign bonds in that foreign bonds are issued by an international company to investors, and are denominated in the currency of the country where the foreign bonds are issued. A foreign borrower issues foreign bonds in a host country’s financial market and the host country’s currency. These bonds are subject to the regulations imposed on all securities traded in the national market and, sometimes, to special regulations and disclosure requirements governing foreign borrowers.