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

Published online by Cambridge University Press:  12 April 2013

Edwin J. Elton ,
Martin J. Gruber ,
Christopher R. Blake  and
Or Shachar
Edwin J. Elton
Affiliation:
eelton@stern.nyu.edu
Martin J. Gruber
Affiliation:
mgruber@stern.nyu.edu, Stern School of Business,New York University, 44 W 4th St, New York, NY 10012
Christopher R. Blake
Affiliation:
cblake@fordham.edu, Graduate School of Business Administration, Fordham University, 113 W 60th St, New York, NY 10023
Or Shachar
Affiliation:
or.shachar@ny.frb.org, Federal Reserve Bank of New York, 33 Liberty St, New York, NY 10045.
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Abstract

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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 2 , April 2013 , pp. 405 - 425
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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