Eurobond Market Case Study

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Q1: According to the textbook, a moral hazard is described as being “the problem created by asymmetric information after a transaction occurs” (Mishkin & Eakins, 2012, p. 26). As far as financial markets are concerned, a moral hazard exists when a lender understands the risk that a borrower might engage in activities that would hinder their ability to repay a loan. As the threat of a moral hazard increases, the likelihood that a borrower will repay a loan decreases (Mishkin & Eakins, 2012). The concept of moral hazards is important to financial institutions because being aware of its existence allows those institutions to implement measures aimed at minimizing the potential threats posed by moral hazards. In a case where a business is in …show more content…
Countries that are facing economic problems might choose to issue their Eurobonds to other countries as a means of getting those other countries to invest in their reform or development (Inman, 2012). Because of the popularity of and the frequency in the issuance of Eurobonds, the “Eurobond market is now larger than the U.S. corporate bond market” (Mishkin & Eakins, 2012, p. 20). There is also a variation of the Eurobond known as Eurocurrencies, which are “foreign currencies deposited in banks outside the home country” (Mishkin & Eakins, 2012, p. 21). As a note for clarification about Eurobonds, a bond denominated in Euros can only be called a Eurobond if it is sold in a country that has not claimed the euro as its native currency (Mishkin & Eakins, …show more content…
The bond market is also known as a debt market, and is the market where debt securities are bought, sold, and traded (Mishkin & Eakins, 2012). The stock market operates around the trading of corporate earnings (stocks) and is more commonly referred to as “the market” (Mishkin & Eakins, 2012, p. 3). The foreign exchange market operates by converting the currency of one country into its equivalent value in another country’s currency. Each market has its importance to the overall financial market and the bond market is no different. The bond market gains its importance by allowing governments and organizations to borrow the funds they need to carry out their operations through the use of bonds (Mishkin & Eakins, 2012). The bond market has an additional importance of providing a place for interest rates to be determined, which helps to create conditions where people and organizations are either encouraged or discouraged to buy and save (Mishkin & Eakins,

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