Definition and Examples of Yankee Depository Receipts
How Does a Yankee Depository Receipt Work?
Special Considerations for Yankee Depository Receipts
How to Open a Yankee Depository Receipt
Definition and Examples of Yankee Depository Receipts
A Yankee Depository Receipt is a negotiable certificate issued by a U.S. branch of a foreign bank. Depository receipts function similarly, where you deposit funds and earn interest. When the receipt matures, you can withdraw the original deposit plus the interest earned. Yankee Depository Receipts operate on the same basis, with one main difference: these receipts are issued by U.S. branches of foreign banks. These receipts can be issued to allow the bank to raise capital, which can be used to fund loans or for other purposes. They are negotiable deposit certificates.
How Does a Yankee Depository Receipt Work?
Many foreign banks have branches operating in the United States. For some of these banks, Yankee Depository Receipts provide a mechanism for raising capital.
In terms of how a Yankee Depository Receipt works, it is not much different from other types of deposit receipts. First, the investor must meet the minimum deposit requirement. However, what differs in Yankee Depository Receipts is that they tend to have higher minimums than those required for other receipts – typically ranging from $1 million to over $1 billion. While it is possible to find Yankee Depository Receipts with lower minimums in the range of $100,000, it is clear they are primarily designed for high-net-worth investors.
Once an investor opens a Yankee Depository Receipt, interest accrues on the receipt until its maturity date. The rate of interest earned may depend on the issuing bank and the duration of the receipt. The terms for deposit receipts usually range from six months to five years, although it is possible to find short-term receipts with terms from 28 to 30 days or receipts lasting up to 10 years. For Yankee Depository Receipts, the maturities may be closer to three years or less.
While traditional deposit receipts may automatically renew and convert into a new deposit receipt, Yankee Depository Receipts may not renew. If a Yankee Depository Receipt does not renew, you can withdraw the original deposit plus the interest earned and decide whether to reinvest it in a new Yankee Depository Receipt or place it in something else.
Yankee Depository Receipts were first issued in the 1970s. Initially, they offered a much higher yield to investors compared to domestic deposit receipts issued by U.S. banks. Since then, yields have declined somewhat as investors have become more confident in foreign banks. Currently, Yankee Depository Receipts are mainly issued by a few international banks based in Japan, Canada, the United Kingdom, and various countries in Western Europe.
Special Considerations for Yankee Depository Receipts
One important thing to note about Yankee Depository Receipts is that they are not insured by the FDIC. The Federal Deposit Insurance Corporation (FDIC) protects deposits up to $250,000 per depositor, per account ownership type, per financial institution in the rare event of a bank failure.
This means if you open a deposit receipt with a U.S. bank and that bank fails for any reason, you can still recover your money up to the allowed limit if it is covered by the FDIC. Since Yankee Depository Receipts are issued by foreign banks with branches in the United States, they do not fall under the FDIC protections.
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The reason it is important to consider the credit rating of the bank issuing a Yankee Certificate of Deposit before making an investment decision. Although certificates of deposit are generally considered safer investments, depositing an investment of $100,000 or $1 million in a Yankee Certificate of Deposit may still pose a risk. As a general rule, foreign banks with higher credit ratings may carry less risk.
Moody’s and Standard & Poor’s are widely used benchmarks for checking bank credit ratings.
How to Open a Yankee Certificate of Deposit
If you are interested in investing and saving using Yankee Certificates of Deposit, the first step is to find a bank that offers them. Since these certificates are typically designed for high-net-worth investors, you may need to look for a foreign bank that provides wealth management services to U.S. clients.
Rabobank and Scotiabank are examples of foreign banks that offer Yankee Certificates of Deposit. When choosing a place to save, consider the maturity duration offered and how comfortable you are with leaving the funds in a Yankee Certificate of Deposit.
From there, opening a Yankee Certificate of Deposit is as simple as depositing the required minimum. But remember: the minimum deposit can be $100,000 or more, so it’s important to consider how much of your portfolio you want to allocate to Yankee Certificates of Deposit. While they may offer a good rate of return, you might achieve better returns by investing that money elsewhere.
Key Takeaways:
- Yankee Certificates of Deposit are certificates of deposit issued by foreign banks with branches in the United States.
- These certificates may be suitable for high-net-worth investors, as they typically require higher minimum deposit limits.
- Once a Yankee Certificate of Deposit matures, you can reinvest it in a new certificate or invest that money elsewhere.
- Yankee Certificates of Deposit are not insured by the FDIC since they are not issued by U.S. banks.
Source: https://www.thebalancemoney.com/yankee-certificate-of-deposit-5204172
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