Archives for September 2005

First, I’d just like to say just because I’m talking about a certain stock or bond doesn’t mean I’m recommending it or going to go out and buy tomorrow. I love learning about new areas of investing, and right now my focus is on increasing the yield on my cash funds for short-term time horizons. Accordingly, I’ve been reading the articles I mentioned in my previous post on ING Prime Rate Trust. First let’s break this down a bit to my level of understanding.

What’s going on? Corporations need money for their operations. Each corporation is given a credit rating by a company like Moody’s, sort of like the Equifax for businesses, as to how credit-worthy they are. Obviously, the higher the risk for default, the higher the interest rates they are charged. Banks loan money to these corporations, and one type of loan is called a floating-rate loan, in which the rate adjusts like an adjustable rate mortage with an index rate, like the LIBOR. Then loan-participation funds like ING Prime Rate Trust (PPR) invest in a diversified portfolio of these loans, focusing on those with less than investment-grade credit ratings.
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I was catching up with my magazine reading when I came across this article in the August 2005 issue of Kiplinger’s Personal Finance* – ‘Big Yields, Not-so-big Risks’. It introduced me to these closed-end loan funds, that trade like stocks, which invest in low-grade bank loans and produce dividend yields of about 6%. Let’s focus one of their examples, ING Prime Cap Trust (symbol: PPR). This fund caught my eye for obvious reasons.

It currently offers a yield of 6.60%, and is actually trading below it’s Net Asset Value. It has a really high annual expense ratio of 3.17%, but that seems to be the norm for these types of funds. What I really need to gauge is how much risk I am taking on for that appetizing extra yield.
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