WATCH OUT INVESTORS--FINRA WARNS INVESTORS ABOUT FLOATING RATE BOND FUNDS

The Financial Industry Regulatory Authority (FINRA) warns that floating rate bank loans come with significant risks, including potential credit, valuation and liquidity problems. Contrary to popular belief, bank loan funds are more correlated with the stocks than bonds. In good economic times floating rate loans may gain in value, though not nearly as much as stocks. But in bad economic times, funds of floating rate loans may perform worse than junk bond funds ("A Risky Reach for Yield," Bloomberg Businessweek).
The bank loans are typically made to buyout firms. These firms have a practice of "piling debt on to companies they own to extract payouts," which "may reduce the credit-worthiness of borrowers and make defaults more likely," according to the article.

As always, investors and their financial advisors need to carefully assess the risks and the investor's investment objective and risk tolerance before investing.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT INVESTORS--FLOATING-RATE BOND FUNDS ARE A "RISKY YIELD PLAY"

According to Jonnelle Marte of the Wall Street Journal, floating rate funds are a "Risky Yield Play." They have significant risks and investors must be aware of the downside. The increased demand for floating rate bonds has the effect of driving down yields. For example, during the credit crunch triple-C-rated companies paid as much as 47 percent for loans, but today that is down to 14 percent. Thus most of the returns have already been made.

Not so obvious is the fact that higher demand also results in looser restrictions for borrowers. These so-called "covenant-lite" loans, which have more relaxed repayment terms that are good for high-risk borrowers but bad for investors, now comprise 20 percent of the market - near the peak of 25 percent in 2007, according to the article.

Investors should be skeptical of the credit quality of floating rate loans. If the economy worsens, investors could experience significant losses.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.