Yankee Bond

What Is a Yankee Bond?

A Yankee bond is a debt obligation issued by a foreign entity, for example, a government or company, which is traded in the United States and designated in U.S. dollars.

Grasping a Yankee Bond

Yankee bonds are administered by the Securities Act of 1933, which requires the bonds to be registered with the Securities and Exchange Commission (SEC) before being offered available to be purchased. Yankee bonds are habitually issued in tranches, individual parts of a larger debt offering or structured financing arrangement that have contrasting risk levels, interest rates and maturities, and offerings might be very large, as much as $1 billion.

There are likewise Yankee certificate of deposits, CDs that are issued in the United States by a branch or agency of a foreign bank.

Advantages of Yankee Bonds

Yankee bonds can address a mutually beneficial opportunity for the two issuers and investors. One of the primary likely advantages for a Yankee bond issuer is the opportunity to get less expensive financing capital at a lower cost in the event that comparable bond rates in the United States are essentially lower than the current rates in a foreign company's own country. The size of the U.S. bond market and the fact U.S. investors actively trade it likewise presents an advantage for the issuer, particularly on the off chance that the bond offering is a large one. In spite of the fact that U.S. regulatory requirements may initially hamper a foreign issuer concerning getting endorsement to offer bonds, conditions for lending in the United States might in any case be less rigid overall than those in the issuer's own country, permitting the issuer greater flexibility in terms of the offering.

A major advantage for U.S. investors in Yankee bonds is such bonds often offer higher yields than the yields accessible on comparable, or even lower-rated, bond issues from U.S. issuers. Another potential advantage is the fact that Yankee bonds offer investors a means of getting international diversification in a portfolio of bond investments. Yankee bonds likewise offer U.S. investors an advantage over investing in foreign corporation bond issues made in the foreign company's nation of origin. Since Yankee bonds are named in U.S. dollars, the currency risk usually associated with foreign bond investments is for all intents and purposes killed.

Disadvantages of Yankee Bonds

One of the disadvantages of Yankee bonds for issuers is the time in question. Due to severe U.S. regulations for the giving of such bonds, it can require over 90 days for a Yankee bond issue to be approved available to be purchased. The endorsement cycle incorporates an evaluation of the issuer's creditworthiness by a debt-rating agency like Moody's or Standard and Poor's.

Another consideration is the interest rate environment. Foreign issuers ordinarily favor giving Yankee bonds when there is a low-interest-rate environment in the United States, since that means the issuer can offer the bond with lower interest payments. Be that as it may, should something send interest rates taking off or plunging in 90 days, it could wreck the carefully calibrated pricing of the Yankee bond, influencing how well it sells.

At long last, a Yankee bond can be impacted by the economy of its nation of origin. So assuming that country has an insecure economy, its price could bring down, or the issuer could run into issues — which could influence its coupon payments. And keeping in mind that the Yankee bond is issued in dollars, it very well may be helpless against some currency risk too, as a country's economic misfortunes frequently influence its cash's performance in the foreign exchange markets.

Features

• On the downside, Yankee bonds can consume a large chunk of the day to come to market, subjecting them to interest rate risk; they are likewise defenseless against currency risk and different issues in their nation of origin's economy.
• Yankee bonds offer the issuer to chance to get less expensive financing and arrive at a more extensive investment crowd; they offer investors the chance for better yields.
• Yankee bonds are subject to U.S. securities laws, as they trade on U.S. exchanges.
• A Yankee bond is a debt obligation designated in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporation, and at times even governments.