Hi Robert,
This came from the CNBC web site which has recently merged with MSN, but I hope you will take the time to read it hear.
Closed-end bond funds
Closed-end funds have special risks, but they also can offer income investors extra returns.
The special risk is that the market prices of these securities, which trade like stocks, will differ from their net asset values. They often do, going to discounts to their net asset values when the funds are out of favor, and premiums when they are hot.
But closed-ends can use leverage to boost returns, which open-end funds cannot. The typical closed-end bond fund can borrow against the high quality of its holdings, hoping for yields that beat the cost of borrowing. As much as a third of the fund’s total assets can be borrowed; that is, a $100 million fund can borrow $50 million, creating a $150 million bond portfolio.
Some closed-end yields are so lush that tax-free bonds yield nearly as much as taxable open-end funds.
Special note“If a fraction of investors knew as much about closed-end funds as open-end funds, we wouldn’t have these discounts,” says Mariana Bush, head of closed-end fund research for First Union Securities. The fact that they don’t creates an opportunity for you.
Fund Current yield Discount to net asset value
RCM Strategic Global Government Fund (RCS, news, msgs) YLD 8.5% - 4.2%
Nuveen Premium Income Municipal (NPI, news, msgs)YLD 6.1* Discount- 7.3
Colonial InterMarket Fund (CMK, news, msgs) YLD 9.8 Discount- 5.3
Hyperion Total Return (HTR, news, msgs) YLD 10.4 Discount- 13.3
Templeton Emerging Markets Income (TEI, news, msgs) YLD 12.4 Discount- 6.2
Notes: Discounts as of 9/18, except HTR, which is 9/6. * Equal to 8.8% for investor in the 31% federal tax bracket.
Sources: First Union Securities, Closed-end Fund Association, MSN Money |
