With Treasury bills yielding just over 2% and a volatile stock market to boot, this is not a good financial environment for retirees and other income-sensitive investors. Moreover, the inflation rate for December was more than 4%, which means that, in many cases, fixed-income investors are losing purchasing power.

So it's understandable that income-thirsty investors could get desperate and look abroad for alternative investments promising higher yields.

No free lunches
It's not difficult to find higher yields elsewhere -- just do a simple Google search. That's how I quickly found an advertisement that highlighted "ultra-safe" Icelandic CDs that yield up to 12.14%.

Sounds tempting, doesn't it? Unfortunately, the offer is probably too good to be true. For one, you'd be putting money in a local Icelandic bank because, due to its remote location and small market, there are no large multinational banks like JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and HSBC (NYSE: HBC) in Iceland. Dealing with a foreign bank that has few (if any) connections to a U.S. bank may be more trouble than it's worth.

And even though Iceland charges no income tax on the interest earned by U.S. investors in Iceland, the Icelandic krona has recently been losing value relative to the U.S. dollar. In November 2007, 100 krona bought $1.65, but recently, it only commanded about $1.50 -- a 9% drop in three months. If that trend continues, that 12.14% "ultra-safe" yield won't look so tempting.

So while these Icelandic CDs may be "safe" in terms of returning your principal and interest at maturity, they may return fewer dollars than you expected.

Desperate measures, desperate costs
In this low-interest rate environment, investors who need income should be on guard for any advertisement promising "safe" high foreign yields. Before purchasing any foreign interest -- or dividend-yielding investment with quoted returns well above the average U.S. rates, be sure to ask a lot of questions, particularly regarding:

  • Tax treatment
  • Liquidity
  • Safety of principal
  • Currency risks
  • Political risks

Good luck raking in the income!

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Fool contributor Todd Wenning would like to visit Reykjavík, the capital of Iceland. He does not own shares of any company mentioned. The Fool's disclosure policy stays warm in the winter.