Replies to post #26375 on A.I.M. Users Bulletin Board (AIMUSERS)

[OldAIMGuy]

Hi Ray, Re: Risk and Reward of using Leverage............

I can understand the concerns on this subject with the high yield funds. The greater the leverage the greater the potential for spoiled opportunities. If they roll over their leverage debt and it costs them more to do so, somewhere it's going to show up. My guess it that it will affect the average payout.

It would be pretty hard to guess what a small increase in their borrowing costs will do to their overall yield. About the best we can do is understand that the downside risk is greater with greater leverage. However, if a fund's average borrowings were done at, say, 6% in the past and rise to 7% (a substantial increase on a percentage basis) overall it might not be that great of an impact on operating costs.

Best regards, Tom

[lrp42]

Here is some information which I found since I posted the first message. It looks like it has to do with the Preferred Shares failing at auction and possible consequences.

http://news.morningstar.com/newsnet/ViewNews.aspx?article=/BW/20080215005504_univ.xml

I don't have much knowledge about how closed-end funds go about arranging their leverage. I certainly did not know about this "auction" process for preferred shares. Looks like I have a lot to learn on this subject.

Ray