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

49 Pages Posted: 16 Apr 2010 Last revised: 12 Jul 2010

See all articles by Edwin J. Elton

Edwin J. Elton

New York University (NYU) - Department of Finance

Martin J. Gruber

New York University (NYU) - Department of Finance

Christopher R. Blake

Fordham University - Gabelli School of Business

Or Shachar

Federal Reserve Bank of New York

Date Written: June 14, 2010

Abstract

In this paper we explore a new explanation of why closed-end bond funds exist when similar open-end funds are available. In general, closed-end funds operate in the less-liquid parts of the market. When we compare closed-end bond funds with a matched set of open-end funds with the same objective, same manager and issued by the same fund family, we find no difference in the returns earned on assets and very little difference in asset holdings. There is a difference in performance, whether measured in terms of return on net assets or market returns. We show that this is due to the use of leverage by closed-end funds. Closed-end funds use leverage, borrowing short and lending long, increasing return on net assets in most years. Examining a large sample of closed-end bond funds, we find that leverage is issued in years with a high term premium. For this large sample, we show that leverage affects the average size of the discount on closed-end funds, its time pattern, and the desirability of closed-end funds to investors. We close with a brief history of performance since the crisis in the credit markets.

Keywords: performance, closed-end bond funds, discounts, leverage

JEL Classification: G11, G20

Suggested Citation

Elton, Edwin J. and Gruber, Martin J. and Blake, Christopher R. and Shachar, Or, Why Do Closed-End Bond Funds Exist? An Additional Explanation for the Growth in Domestic Closed-End Bond Funds (June 14, 2010). Available at SSRN: https://ssrn.com/abstract=1591157 or http://dx.doi.org/10.2139/ssrn.1591157

Edwin J. Elton

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0361 (Phone)
212-995-4233 (Fax)

Martin J. Gruber (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0333 (Phone)
212-995-4233 (Fax)

Christopher R. Blake

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Lowenstein Building
New York, NY 10023
United States
212-636-6750 (Phone)

Or Shachar

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6974 (Phone)
(212) 720-1582 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
345
Abstract Views
2,149
rank
86,998
PlumX Metrics