Bank Loan Funds No Free Lunch

When interest rates are low, some investors stretch for yield by taking on credit risk. At the same time, many investors are also seeking alternative ways to protect themselves against a potential rise in interest rates, without sacrificing that hard-earned yield.

These dual concerns have led many to consider bank loan funds, which recently have had more inflows than any other domestic fixed-income asset class.

Other Than Recent Returns, What Makes Bank Loan Funds So Popular?

Bank loans, a type of corporate debt, have a maturity date and pay interest. Their interest payments, however, are determined based on a floating reference rate (typically Libor) plus a fixed spread. Depending on the loan agreement, the rate is adjusted periodically, typically at intervals of 30, 60 or 90 days.

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