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Author: Ganymede97 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35345  
Subject: closed-end funds & leverage Date: 12/9/1999 12:09 PM
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I was recently looking into some closed-end municipal bonds funds when I noticed a few of them claimed to use "leverage." The advertisements claimed the funds somehow issued preferred stock and thus created leverage. Would someone be so kind as to walk me through the reasons why issuing preferred stock would create leverage for the fund, and why anyone would want to BUY preferred stock in a closed-end bond fund. Thanks!

I can see how the deploying of the equity money raised in a preferred offering could be re-invested in bonds at perhaps a higher coupon rate than what is paid on the preferred equity (assuming the equity pays a dividend). But what does the preferred equity really have a claim to? Is it simply seniority in the event that the fund is liquiidated? If so, I guess a generic investment in a closed-end fund is essentially like being long a dividend paying common stock. (granted the upside is limited to the cash flows assoicated with the underlying assets simply being municipal bonds). And preferred equity participants perhaps take a slight dividend cut to gain seniority in the capital structure. I'm still confused.

Any comments?

-G
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