What makes yankee CD a low risk product?
In general certificate of deposits are high denomination deposits that are locked in for a period in return for higher interest rates. They are basically differentiated into fixed rate certificates of deposits and variable rate certificates of deposits. While fixed certificates of deposits attract a fixed interest rate on through out the tenure of deposit, variable certificates of deposits attract fluctuating interest rates.
There exists another classification of certificates of deposits and they are- Domestic CDs, Euro CDs and Yankee CDs. While domestic CDs are issued within the country of residence of the investor, Euro CDs are issued by foreign nations and the funds are deposited in terms of the currency of the issuing bank. Finally, Yankee certificates of deposits are those certificates of deposits that are issued in the United States by the branch of a foreign bank.
Source of Yankee CDs
These certificates of deposits are generally and usually released in New York. The different banks that have their origin in foreign countries but have branches located in U.S and particularly in New York, generate their personalized certificates of deposits in the market of United States.
Since the investment amount is so high so these Certificate of Deposits can be availed only by large investors. The huge investments make these investors look for investments with low risks. The rates of Yankee certificates of deposits are low and therefore they have lower risks than other certificates of deposits. The investor’s money remains secured in this type of investment. The minimum face value for availing these certificates of deposits is $100000. These are negotiable certificates of deposits. Since these certificates of deposits are usually held by large financial institutes and banks therefore the date of maturity and the interest rates are negotiable. This feature of the Yankee certificate of deposit makes it sellable in the derivative market.
The only drawback of these certificates of deposits is that they can not be cashed before the end of the maturity date. In case the funds are withdrawn before the maturity date gets over then the issuing bank will have the right to charge penalties. Since the face value of these certificates of deposits are so high therefore the penalties charged are also high and might eat away almost half the fund amount. This is the reason Why Yankee certificates of deposits are availed by only investors who have a strong financial background and can keep such huge amounts locked in for longer period of time.