The Premium-Discount Puzzle of Closed-End Bond Funds: An Empirical Examination of the Dividend Yield Preference Hypothesis

25 Pages Posted: 26 Jun 2003

See all articles by Yul W. Lee

Yul W. Lee

University of Rhode Island - College of Business Administration

Keith M. Moore

St. John's University - Department of Economics and Finance

Date Written: January 2003

Abstract

This paper attempts to make a contribution to the understanding of the factors that determine premiums/discounts of closed-end bond funds. Much research has been conducted to explain closed-end equity fund premiums/discounts. Very little evidence, however, has been developed to explain why closed-end bond funds trade at premiums over or discounts from net asset values. In this paper, we hypothesize that short-term investors who seek a high current yield look to closed-end bond funds as a monthly income vehicle. In addition, closed-end funds allow individual investors with a short investment horizon to get in and out of the funds easily. We present evidence that there is a significant and positive relation between bond fund premiums and the dividend yield. We also examine whether closed-end bond fund premiums/discounts are related to other factors such as leverage, future investment performance, lifeboat provisions, anti-takeover provisions, and liquidity.

JEL Classification: G1, G40

Suggested Citation

Lee, Yul W. and Moore, Keith M., The Premium-Discount Puzzle of Closed-End Bond Funds: An Empirical Examination of the Dividend Yield Preference Hypothesis (January 2003). Available at SSRN: https://ssrn.com/abstract=410184 or http://dx.doi.org/10.2139/ssrn.410184

Yul W. Lee (Contact Author)

University of Rhode Island - College of Business Administration ( email )

Kingston, RI 02881
United States

Keith M. Moore

St. John's University - Department of Economics and Finance ( email )

Jamaica, NY 11439
United States
718-990-7323 (Phone)

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