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I understand why bond CEF's move down initially from their offering price the first several months. My question is why do so many of these bond CEF's after several years trend lower in price? Most never recover even close to their initial price offered. My guess is defaults?? Any experts out there?
a)Use of leverage -- leverage will amplify the results of one's investment bets. If an investor bets wrong (which may be explained away as 'being early' or 'staying too long') the leverage amplifies NAV decline.
b)Over-distribution. Many CEFs tend to overdistribute (distributing much more than the underlying portfolio is producing in income). The natural result if (for example) a portfolio produces $1 of income, but distributes $1.10, $1.25 or $1.50 of distributions, is that NAV is systemically depleted.
Comments
a)Use of leverage -- leverage will amplify the results of one's investment bets. If an investor bets wrong (which may be explained away as 'being early' or 'staying too long') the leverage amplifies NAV decline.
b)Over-distribution. Many CEFs tend to overdistribute (distributing much more than the underlying portfolio is producing in income). The natural result if (for example) a portfolio produces $1 of income, but distributes $1.10, $1.25 or $1.50 of distributions, is that NAV is systemically depleted.
Good luck.