Fixed Income I
Reading 42. Fixed-Income Securities: Defining Elements
Learning Outcome Statements
d. describe how legal, regulatory, and tax considerations affect the issuance and trading of fixed-income securities;
CFA Curriculum, 2020, Volume 5
Subject 3. Legal, Regulatory and Tax Considerations
The bond market can be classified into two markets: an internal market and an external market.
Internal Bond Market
The internal bond market is also called the national bond market. It is divided into two parts: the domestic bond market and the foreign bond market. The domestic bond market is where domestic issuers issue bonds and where these bonds are subsequently traded.
A foreign bond (called a Yankee bond in the U.S., a Samurai bond in Japan, and a Bulldog bond in the U.K.) is a bond issued in a country's national bond market by an issuer not domiciled in the country where those bonds are subsequently traded.
- Regulatory authorities in the country where the bond is issued impose rules governing the issuance of foreign bonds.
- Issuers of foreign bonds include national governments and their subdivisions, corporations, and supranationals (entities formed by two or more central governments through international treaties).
- They can be denominated in any currency.
- They can be publicly issued or privately placed.
External Bond Market
This market is also referred to as the international bond market, the offshore bond market, or the Eurobond market. The bonds in this market are:
- underwritten by an international syndicate.
- offered simultaneously to investors in a number of countries at issuance.
- issued outside the jurisdiction of any single country. Therefore, they are not registered through a regulatory agency.
- in unregistered form.
Eurobonds are subject to a lower level of listing, disclosure, and regulatory requirements than domestic or foreign bonds.
Eurobonds are classified according to the currency in which the issue is denominated. For example, if a Eurobond is denominated in U.S. dollars, it is called a Eurodollar bond. A USD bond issued by Ford and sold in Japan is thus called a Eurodollar bond, not a Euroyen bond.
A global bond is a debt obligation that is issued and traded in both the Eurobond market and at least one domestic market (for example, a USD bond issued by the Canadian government sold in the U.S. and Japan). Issuers of global bonds typically have high credit quality, and regularly have large fund needs. The first global bond was issued by the World Bank.
In general the income portion of a bond is taxed at the ordinary tax rate. Some countries implement a capital gains tax. Some countries even differentiate between long-term and short-term capital gains. There may be specific tax provisions for bonds issued at a discount or bought at a premium.