The attractions of closed-end bond funds

C losed-end mutual funds have attracted considerable interest in recent years in both the academic literature and the business-oriented press [3, 4, 5, 6, 7, 101. Authors have focused on the opportunity afforded investors of purchasing shares at discounts from net asset value.' This not only serves to limit downside risk; it enables investors to acquire $1 worth of assets which may be income-producing (thus increasing the current yield on the investment) for less than $1. An added attraction of closed-end funds to many investors is that a positive return may be realized even though the net asset value does not change! Assuming a fund sells at a discount from net asset value, a reduction in the size of the discount produces a gain for the shareholder. The causes of these discounts have not been fully explained, which has caused some to question the efficiency of the market for closed-end fund shares. While closed-end mutual'funds have attracted interest, this interest has been focused on equity funds. Little has been written regarding closed-end bond funds? The risks associated with trading bond funds (be they open-ended or closed-ended) would appear to be lower than those associated with stock funds, but it may be possible to reap rewards comparable to those from equity type investments. The primary objective of this paper is to analyze these bond funds for the purposes of 1) describing their nature, 2) analyzing their premiums, discounts, and volatility over time, 3) comparing the bond funds with alternative fixed-income type investments, and 4) considering factors that may influence the discounts or premiums. We begin with a brief history and overview of closed-end bond funds and then briefly review the literature dealing with closed-end funds. After 56 I