A Yield to Caution

Article Excerpt

SENIOR SECURED FLOATING RATE LOAN FUND $9.47 (Toronto symbol FRL.UN; Units o/s: 5.6 million; Market cap: $53.0 million; Dividend yield: 7.0%; www.fieracapital.com) is a closed-end fund that invests in senior secured floating-rate corporate bonds. The fund’s MER is 1.25%, and it trades at a slight discount to the value of its assets. The Senior Secured Floating Rate Loan Fund yields a very high 7.0%. However, with fixed-income investments, high yields often signal danger rather than a bargain. In general, bond prices drop as interest rates rise. However, in the case of this fund, that risk is cut. Unlike a bond that has a fixed coupon amount, the coupon payment of a floating-rate loan resets when interest rates change. As a result, their value tends to remain relatively stable in a rising interest-rate environment. But there are other risks: The firms issuing the bonds that the fund invests in are mostly private companies, and so they’re not traded on a stock exchange. That makes them difficult to value…