What is a Closed-end bond fund (CEF)?



A closed-end bond fund is an investment company that raises money through an initial public offering (IPO) and then invests the money in a portfolio of fixed-income securities. The fund is then traded on a stock exchange.

The fund may use leverage, which means it can borrow money to invest in more securities. This can help the fund to generate higher returns, but it also increases risk.

Closed-end bond funds can be a good way to diversify your portfolio and get exposure to different types of fixed-income securities. They can also offer higher potential returns than other types of investments, such as government bonds. However, you should be aware of the risks before investing in any fund.

What is a Closed-End Bond Fund?

A closed-end bond fund is an investment company that pools money from many investors and invests it in a variety of debt securities, usually issued by corporations or governments. A closed-end bond fund typically has a set number of shares outstanding and does not issue new shares or redeem existing shares.

What are the benefits of investing in a CEF?

CEFs offer many potential benefits for income-seeking investors, including the following:

-The ability to generate high current income – Most CEFs sport high distribution rates that can dramatically increase the income of portfolios. For example, the Guggenheim DoubleLine Income Fund (DLN) currently yields 7.7%.
-The potential for capital appreciation – Unlike traditional bond funds, CEFs can trade at a premium or discount to their net asset value (NAV). If you purchase a CEF at a discount, you immediately realize a capital gain when the fund’s share price moves up toits NAV. Conversely, if you buy a fund at a premium, you may experience a paper loss even if the fund’s underlying portfolio holds its value or appreciates. That said, over time, most CEFs have tended to trade close to par.
-Professional management – Like all mutual funds, closed-end funds are required to appoint an investment advisor who is responsible for making all investment decisions and managing the day-to-day operations of the fund. This offers investors access to professionals with deep expertise and resources that they may not have access to on their own.
-Diversification – By investing in a CEF, you can gain exposure to a wide variety of assets and sectors that may be difficult or costly to invest in directly. For example, Guggenheim Investments offers several specialty CEFs that invest in hardto-reach corners of the fixed income market, such as junk bonds, preferred securities and mortgagebacked securities.

What are the risks of investing in a CEF?

CEFs are subject to the same risks as other types of bond funds, but there are a few unique risks to consider as well.

1. Interest rate risk: This is the risk that bond prices will fall as interest rates rise. CEFs are especially vulnerable to this risk because they often use leverage, which amplifies the effects of changes in interest rates.

2. Default risk: This is the risk that a bond issuer will default on its payments. CEFs that invest in lower-quality bonds (junk bonds) are especially vulnerable to this risk.

3. Manager risk: This is the risk that a CEF’s manager will make poor investment decisions. This can be a particular concern with smaller CEFs, which may be less experienced or less well-resourced than larger ones.

How do Closed-End Bond Funds work?

CEFs are a type of mutual fund that issues a set number of shares to investors, and does not redeem them. CEFs are traded on a stock exchange, and their share prices may be more volatile than traditional mutual funds because they are not redeemed by the fund. Closedend bond funds can be a good option for investors looking for income, but they come with some risks.

How are CEFs structured?

Closed-end funds are managed by an Investment Manager like an Open-end fund, but the structure of a Closed-end fund is different. With an Open-end fund, the investment manager creates new shares or “unit trust” as they are called in the UK, when money flows into the fund and cancels shares when money flows out.

With a Closed-end fund, there is a set number of shares issued at the launch of the fund. These shares are then traded on a stock exchange. The share price will go up and down according to supply and demand for the shares. The share price is not linked to the NAV per se, but to market sentiment about the underlying assets and future prospects for the fund.

A key feature of Closed-end funds is that they can use gearing or leverage. This means that they can borrow money to invest in addition to the money raised from shareholders. This can magnify both gains and losses and so Closed-end funds tend to be more volatile than Open-ended funds.

How do CEFs trade?

Closed-end funds are bought and sold on stock exchanges like other publicly traded securities. The Funds’ share prices will fluctuate with changes in the market value of the underlying assets, as well as other factors. Unlike traditional open-end mutual funds, closed-end funds have a limited number of shares issued. As a result, closed-end fund shares may trade above (at a premium) or below (at a discount) their net asset value (NAV).

The NAV per share is calculated by dividing the total assets of the fund minus its liabilities by the number of outstanding shares. Each closed-end fund’s website provides NAV data updated daily. You can also find this information in most financial newspapers and online financial portals such as Yahoo! Finance, CNBC, Nasdaq and Bloomberg.


Closedend bond funds can offer investors a way to receive higher yields than traditional bond funds, as well as exposure to a variety of different types of bonds. However, it is important to remember that closedend funds are subject to market price fluctuations and may trade at a discount or premium to their net asset value.

When considering investing in a closedend bond fund, be sure to research the fund carefully and consider your investment objectives and risk tolerance before making a decision.

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