Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Directions
Newsletter Sign-up
Site Search
Site Map
Home
Tell A Friend About This Website
 
 
 
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise

When interest rates rise, fixed income investments, like bonds, decrease in value, or so the theory goes. However, rising interest rates do not always mean losses for all fixed income investments. Bank loan funds, also known as prime rate funds, are an exception to the rule. In fact, they can even be labeled as alternative fixed income investments.

How They Are Constructed:

A bank loan mutual fund invests in senior-secured floating-rate bank loans that are based on Prime Rate or Libor (also known as the London Interbank Offer Rate - a kind of international prime rate). The rate the borrower usually pays is typically a few percent more than the Prime Rate or Libor. The loans are created when banks lend money to corporations to purchase large amounts of equipment or to build new facilities. Many banks sell the loans, mainly to mutual funds and other institutional investors, while others hold them in their own accounts.

Interest-rate fluctuations are another reason to consider bank loan funds. Bank loans don’t increase or decrease in value inversely to movements in interest rates in a significant manner, as bonds do. This is due to bank loan interest rates resetting themselves within 60 to 90 days after interest rates change. However, when interest rates are increasing, the loans will slightly increase in value (the opposite of bonds), and vice versa; therefore, it is possible to increase or decrease in value.

Credit And Liquidity Risks:

Bank loan funds have little or no correlation with any asset class and can be a good hedge against declining stock prices and inflation. However, the credit and liquidity risk on these vehicles are a consideration that should not be overlooked.

One risk is that banks may lend to companies who are poor credit risks. This means the borrowing companies could default on the loan, which could eventually become worthless. In addition, most of these loans are not monitored by credit agencies since the lending banks provide the credit analysis. This risk is somewhat mitigated by the fact that most bank loan funds only buy senior-secured loans, meaning in the event of a liquidation, they are pledged against the physical assets that were purchased or constructed, which should provide ample protection in most situations. Furthermore, bank loans purchased by bank loan funds have a very good history with very few defaults occurring, to date.

Also, credit risk is significantly reduced with the knowledge that the secured assets can be sold to pay off the loan. Bank loans are higher in a company’s capital structure than are bonds, so they will be paid-off first. In fact, when loans have defaulted, frequently the fund receives stock of the defaulting company, which often rises in value when the company comes out of bankruptcy thereby allowing the fund to receive a greater principal value than the loan itself. However, this type of event is not a panacea. Many companies do not come out of bankruptcy and it may take a few years for the fund to receive its money from the pledged assets when they are liquidated. Another added safeguard is the fact that portfolio managers of bank loan funds perform their own credit analysis of all loans before purchasing them.

The market for bank loans is relatively small. Therefore, these loans are not very liquid. Consequently, access to one’s money is not immediate. Most funds allow redemptions only once per quarter or once per month, depending on the fund. This is actually a positive because investor monies will not be redeemed from the fund all at once.

Another liquidity problem concerns pricing. The Securities and Exchange Commission strongly encourages bank loan funds to utilize outside pricing services. These pricing services estimate the value of each loan on a daily basis. Bond funds frequently use pricing services as well to price infrequently traded bonds such as municipals. The good news is that trading volume has increased on bank loans. This with the utilization of pricing services has made bank loan funds significantly more viable investments and liquid.

Alternative Fixed Income Investments:

Bank loan funds can be considered an alternative Fixed Income Investment since they make money when bonds don’t. As interest rates increase, these funds are an even more valuable part of any portfolio. Unlike many of its fixed-income counterparts, bank loan funds have performed well in 2003 and especially since July when interest rates began to rise. We believe these investments will become significantly more popular in the next few years as interest rates rise.

For further information, contact Louis P. Stanasolovich, CFP™ at (412) 635-9210 or e-mail him at legend@legend-financial.com.



INDEX
  • Key Components Of A Post-Divorce Estate Plan
  • Lending Money? Watch Your Tax Step
  • Watch Out For ''Grandparent Scams''
  • Tune Into The Tax Break For NUA
  • How You Can Manage Risk Aversion
  • When To Disclaim An Inherited IRA
  • IRS Reveals The ''Dirty Dozen'' Tax Scams For '17
  • Timely Tax Angles To Dividends
  • 7 Financial Steps Forward In A Second Marriage
  • IRS Applies IRA Rollover Limit To Coverdell ESAs
  • Seek The Comfort Of A Pet Trust
  • Mutual Fund Sell Downs And Other Unintended Consequenses For Investors:
  • What's The Truth About Probate?
  • Britain Votes To Leave The European Union, Surprising The World
  • Five Big Tax Penalties To Avoid At All Costs
  • 5 Reasons To Amend Your Estate Plan
  • Top Court Mandates 401(k) Fee Duty
  • Turning Up The HEET For Education
  • Saving For Private Or Prep School? A Tax-Smart Way
  • Here Are 6 Common Roth IRA Mistakes To Avoid
  • IRS Zeroes In On Dirty Tax Scams In 2015
  • Combine Investment And Tax Benefits In 529 Plans
  • Want To Get Your Business Noticed By The News Media?
  • Learn The Ins And Outs Of Education Tax Breaks
  • Locked Out Of A Roth IRA? Go In Through Back Door
  • How To Manage Your Tax Brackets Now And Later
  • Fill Up Tax Brackets To The Brim
  • Why Roth IRAs Are Still Red-Hot
  • Want To Get A Copy Of Your Credit Report? It's Free!
  • 5 Tips That Can Help Get Your Kids Into College
  • Reminders On Your Beneficiary Choices
  • Enter The Five Dimensions Of Federal Income Taxes
  • How Did The Federal Government Shutdown Affect The Economy?
  • SLATs Fit Through The Cracks In Estate Plans
  • The Bypass Trust: Not Pronounced Dead Quite Yet
  • When Do You Need An Appraisal?
  • 7 Major Tax Changes In The Fiscal Cliff Law
  • What Is Safe For You To Put Into A Safe Deposit Box?
  • Dig Deep Into ''Treasure Assets''
  • It's A Question Of Proper Balance
  • Tough Talk On Hardship Withdrawals
  • Stock Option Rules After Job Loss
  • Don't Put Mid-Year Moves On Hold
  • Which Retirement Funds Should You Withdraw First?
  • Is The Federal Reserve Risking Hyperinflation?
  • A Common Error In Powers Of Attorney
  • When Is Life Insurance A Sensible Solution?
  • 5 Excellent Tax Blogs And Websites
  • Knowhow On Year-End Tax Planning
  • A Once-In-A-Lifetime Estate Tax Choice
  • Set Up Your Trust To ''Fail'' On Purpose
  • Charitable Rollovers: There's Still Time
  • 7 Reasons To Update Your Financial Plan
  • Website Matches Volunteers With Non-Profits In Need
  • Trust Protector Is Useful, But Little-Known Solution
  • Tax Tips When You Acquire Software
  • Not All ETFs Are Tax-Efficient Anymore
  • The Delicate Dynamics Of China-U.S. Economic Policy
  • U.S. Government Bailouts Have A Mixed Record
  • Planning Your Retirement Using Stock Options
  • What Historically Follows Severe Economic Crises
  • Despite The Global Crisis, The World Is Getting Better
  • Will The New Silicon Valley Transform The Economy?
  • What A Difference A Year Makes In Ten-Year Returns
  • Now's A Time To Recall Financial Planning Basics
  • The Importance Of Year-Round Tax Planning
  • Federal Estate Tax Exemption... Going Up!
  • Court Ruling Limits Fee Deductions For Trusts
  • Not All Variable Annuities Have High Fees
  • Are You Putting Too Much Money Back Into Your Business
  • Credit Crunch Places Focus On Rating Agencies
  • Find An Expert In Almost Anything On The Internet
  • Beware Of Social Security Identity Theft
  • Regulatory Guidelines Update
  • Succession Planning For Solo Businesses
  • Energy Systems Scale and Timeline
  • The Oil Patch Profit Squeeze
  • Free Credit Reports Available Online
  • Don't Forget About Roth 401(k)
  • Understanding the Importance of a Fiduciary Standard
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Timber As A Liquid Investment
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Ethanol: Salvation or Panacea?
  • Timber Facts
  • Bank Loan Funds - A Primer
  • A Primer On Managed Futures
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio?
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • How Volatile Can The Stock Market Be?
  • Too Many ''Phish'' In The Sea
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • The Case For Industrial Metals
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • Know The Score
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Identity Theft: Everyday Prevention
  • Identity Theft: Help Is On Its Way
  • Identity Theft: Tips to Protect Yourself
  • Identity Theft: What Documents Should You Shred or Store?
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • Identity Theft: A Note About Social Security Numbers
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • REITs: A Great Diversification Investment
  • What Is Risk?
  • How To Find A Great Financial Advisor?
  • Is It Time To Find A New Financial Advisor?
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Understanding Deflation
  • Tax Issues To Consider When Buying A Long-Term-Care Policy
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Evaluating The Quality Of A Company's Earnings
  • Yesterday's Great Companies
  • 2001 Tax Relief Act Changes Education Planning
  • A Retirement Plan Primer After The 2001 Tax Act
  • Beware Of Common Home Repair Scams
  • Custodial Accounts: One Way To Make Gifts To Children
  • Estate Taxes To Be Reduced Then Repealed In 2010
  • Faulty IRA Conversions Can Lead To Tax Penalties
  • Many Individuals Pay Private Mortgage Insurance Beyond When It Is Necessary
  • Rethinking Estate Planning
  • Retirement Plan Contribution Limit Changes
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Five Tips For Preventing Thefts From Your Checking Account
  • Home Office Deductions: Hoops To Jump Through
  • Income Tax Effect On Single And Married Taxpayers
  • Income Tax Planning For Investments
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • When Do You Need Life Insurance
  • Year-End Tax Defferal Planning
  • Is Your 401(k) Plan A Failure?



  • ©2017 Legend Financial Advisors, Inc.®. All rights reserved.