Debt Instruments – What is Yankee Bond?
What is Yankee Bond?
A US domestic bond sold primarily to the US market, issued in dollars by a non-US issuer registered with the SEC. Similar nomenclature applies to other markets (Bulldog in the UK, Samurai in Japan).
In simple terms, a Yankee bond is a bond issued in the United States by a foreign company and denominated in U.S. dollars. These bonds are attractive to foreign issuers because they allow them to access the large and liquid U.S. capital markets and provide a way for foreign investors to invest in non-U.S. companies.
How do Yankee Bond reflect in financial statements?
In financial statements, Yankee bonds are reflected as liabilities. They are recorded as long-term debt on the balance sheet, and the periodic interest payments made to bondholders are recorded as interest expense on the income statement. The principal amount of the bond is recorded as a liability and is reduced over time as the bond matures and the issuer repays the bondholders. The interest payments and the repayment of the principal are both cash outflows for the issuer, and they have an impact on the issuer’s cash flow statement.
Benefits of Yankee Bond
- Access to Capital: Yankee bonds allow foreign issuers to access the large and liquid U.S. capital markets, enabling them to raise capital for their operations.
- Diversification: Yankee bonds provide a way for foreign investors to invest in non-U.S. companies and diversify their portfolios.
- Currency Hedging: By issuing bonds in U.S. dollars, foreign issuers can hedge against currency fluctuations and minimize the impact of currency risk.
Risks of Yankee Bond
- Currency Risk: While the issuance of Yankee bonds provides a form of currency hedging, the issuer is still exposed to currency risk, as the value of the bonds and interest payments will be impacted by changes in exchange rates.
- Interest Rate Risk: Changes in U.S. interest rates can impact the value of Yankee bonds and the interest payments received by bondholders.
- Credit Risk: Yankee bonds are subject to credit risk, which is the risk that the issuer will be unable to make interest payments or repay the principal when the bond matures.
- Political Risk: Yankee bonds are subject to political risk, which is the risk that changes in political conditions could impact the issuer’s ability to make interest payments or repay the principal when the bond matures.
