Why Do Closed-End Bond Funds Exist? An Additional Explanation for the Growth in Domestic Closed-End Bond Funds

Why Do Closed-End Bond Funds Exist? An Additional Explanation for the Growth in Domestic Closed-End Bond Funds

This paper provides a new explanation for why closed-end bond funds coexist along with otherwise identical open-end bond funds. Closed-end bond funds offer investors the opportunity to leverage their fixed income investment at very low borrowing rates and are attractive to investors for this reason....

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Bibliographic Details
Published in:Journal of financial and quantitative analysis Vol. 48; no. 2; pp. 405 - 425
Main Authors: Elton, Edwin J., Gruber, Martin J., Blake, Christopher R., Shachar, Or
Format: Journal Article
Language:English
Published: New York, USA Cambridge University Press 01-04-2013
Subjects:
Bond management
Bond portfolios
Closed end investment companies
Discounts
Dividends
Financial leverage
Investors
Leverage
Municipal bonds
Preferred stock
Stock market indices
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Summary:This paper provides a new explanation for why closed-end bond funds coexist along with otherwise identical open-end bond funds. Closed-end bond funds offer investors the opportunity to leverage their fixed income investment at very low borrowing rates and are attractive to investors for this reason. We find that differences in leverage are reflected in the discount on closed-end bond funds in a manner consistent with the advantage of leverage.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109013000136