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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35345  
Subject: Re: closed-end funds & leverage Date: 12/9/1999 12:52 PM
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I don't really know, but I would guess that preferred stock has a fixed dividend, while "common" shares do not. Therefore, if you borrow funds at the preferred rate and then speculate on the change in bond values from interest rate changes etc, you could conceivably earn capital gains that exceeded your borrowing costs. This would let you earn more in your closed end bond fund than you would from interest on the bond holdings alone.

Of course the scenario can work in reverse with the result that common stock owners earn less than interest on the bonds themselves after they have paid off the loan costs. Management of this fund had better be on its toes.
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