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Floating Rate Bond Funds
Old 09-01-2011, 04:34 PM   #1
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Floating Rate Bond Funds

T. Rowe Price is going to be offering a new bond fund- T. Rowe Price Floating Rate Fund, ticker symbol PRFRX,

This fund offers investors the potential for high current income and capital appreciation by investing in floating rate loans and floating rate debt securities. Floating rate loans represent amounts borrowed by companies or other entities from banks and other lenders. In many cases, they are issued in connection with recapitalizations, acquisitions, leveraged buyouts, and refinancings. Most, if not all, of the loans in which the fund invests will have a below investment-grade credit rating or not be rated by a major credit rating agency. The loans in which the fund invests are often referred to as “leveraged loans” because the borrowing companies have significantly more debt than equity.

This fund could have greater price declines than a fund that invests primarily in high-quality bonds or loans; the loans and debt securities held by the fund are usually considered speculative and involve a greater risk of default and price decline than higher-rated bonds.

Does anyone have an opinion about these types of bond funds and whether they should play a role in my portfolio. Thank you for the insight.
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Old 09-01-2011, 05:29 PM   #2
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They are crammed with junk rated loans. Little interest rate risk, a good amount of credit risk. Can be a good value at times, but likely to be more volatile than a bond index.
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Old 09-01-2011, 05:30 PM   #3
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I've held FFRHX for many moons. It is considered by many to be the bluechip of floaters, although, if you glance at a chart you will see they trade much like stocks.
Even though they can be junky, senior loans are at the front of the pay line should the company go south.
So if you believe interest rates may rise, then these are a good deal.
I'm keeping my floater, but at this point I think I favor HighYield funds a touch more. SPHIX is my choice here.
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Old 09-01-2011, 06:10 PM   #4
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NEC is changing to a floating rate strategy soon. It is a closed end fund that trades at North of a ten percent discount to the underlying assets.
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NEC?
Old 09-01-2011, 11:54 PM   #5
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NEC?

Brewer,
I can't find NEC. What is the correct symbol?
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Old 09-02-2011, 08:36 AM   #6
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[mod edit] autocorrect! It should be JQC.
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Old 09-02-2011, 10:35 AM   #7
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These sound just like the CDOs that some of the people I worked with managed a long time ago... they never seemed like a good deal to me unless you have a lot of money...

IOW, if they buy 'good' loans, the only thing you get is the interest rate and have the risk of default... if they buy distressed loans, your interest rate is much higher, but so is you risk of default.... but you do have the possibility of the loan recovering and getting a gain...

It is all in the picking on one of these funds...
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Old 09-02-2011, 11:53 AM   #8
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Quote:
Originally Posted by Texas Proud View Post
These sound just like the CDOs that some of the people I worked with managed a long time ago... they never seemed like a good deal to me unless you have a lot of money...

IOW, if they buy 'good' loans, the only thing you get is the interest rate and have the risk of default... if they buy distressed loans, your interest rate is much higher, but so is you risk of default.... but you do have the possibility of the loan recovering and getting a gain...

It is all in the picking on one of these funds...
Nah, these are just junk bonds that are higher in the capital structure. Simple as that.
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Old 09-03-2011, 11:51 AM   #9
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Quote:
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They are crammed with junk rated loans. Little interest rate risk, a good amount of credit risk. Can be a good value at times, but likely to be more volatile than a bond index.
I tend to agree. Only thing is the floating rate bonds do seem to have shorter maturities, so there "might" be a little less risk than the traditional junk bond fund.

Note, I'm not saying junk bonds are awful. I just think it's better to compare the floating rate stuff with other bond funds as opposed to cash portion of the portfolio (seems most folks want to try to maximize their cash allocation by going with floating rate stuff).
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