What are Yankee Bonds?
Yankee bonds are Foreign bonds that are denominated in US dollars. The reason for taking a Yankee bond is issuer needs to pay less interest as compared to other interests. Yankee bonds are sold in the U.S. and are valued in dollars ($). It is registered with the US Securities & Exchange Commission (SEC). As Yankee bonds are intended to be purchased in the primary market from U.S. citizens, they have to comply with SEC regulations. It is usually issued by Foreign companies, Government utilities, or Banks. The issuer can raise a huge fund with the help of the Yankee bond. They are the US equivalent of “Eurobonds”. It is important to note that Yankee bonds are not as same as Eurobonds it is just similar to them.
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How Does Yankee Bond’s work?
Let’s assume that there’s an Australian Company named “ABC”. IF ABC wants to issue a bond in the United States (U.S.) that is denominated in U.S. dollars ($), the bond issues by them are known as Yankee bonds. Like normal bonds, Yankee bonds obligate the issuer to pay a certain interest rate & principal amount according to the terms & conditions stated in the indenture. Usually, the interest rates in Yankee bonds are less as compared to their country rates. However, before they are issued, they must be registered with the SEC, and that may take months. For most instances, Yankee bonds are issued in tranches, which are individual parts of the larger debt offering, and may also be structured with varying levels of risk, maturity, or interest rate. The offering can be really high up to 1 billion dollars.
Advantages of Yankee Bond:
- One of the biggest advantages for the issuer issuing Yankee bonds is that it can create cheaper financial capital at a low cost, as interest rates in the U.S. are comparatively less than interest rates in a foreign company’s own country.
- The size of the US bond market is big and investors are ready to invest in their type of bonds so the company can generate huge capital.
- One of the biggest advantages for investors is that they get good returns on investment compared to other types of bonds issued from US issuers.
- Investors in the US get the opportunity to invest in foreign bonds and help them diversify their portfolios.
- Since the Yankee bond is denominated in Foreign currency the risk of foreign currency is eliminated.
Disadvantages of Yankee Bond:
- The disadvantage of Yankee bonds for the issuer is that it takes a lot of time to issue this bond as the US regulations are strict and the company is rated by credit rating agencies such as moody’s, S&P, Fitch. It takes more than 3 months to approve the bond for sale.
- The issuer usually issues Yankee bonds as there is a low rate of interest as compared to their own country. But as the approval takes more than 3 months the interest rates may fluctuate & the rates may go up and the issues would have miscalculated their plan which would probably lead them to lose.
- Yankee bonds appear to be riskier investments compared to US domestic bonds, and this is great if they do well since their yields would surpass any comparable US debt instrument. However as many of them are considered risky like junk bonds, it could be a bad investment.
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Final thoughts:
Yankee Bond is a good category of bonds for foreign companies whose interest rates are high in their own country. It is a win-win situation type of bond for both investor and issuer. But it has certain drawbacks as well. But a good risk management strategy will help to issue Yankee Bond.
Author: Hariharan Krishnan
About the Author: Hariharan Krishnan is an undergraduate currently pursuing BAF and also pursuing FRM Course. He is passionate to learn about new things.
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