Abstract
This paper attempts to make a contribution to the understanding of the factors that determine premiums/discounts of closed-end bond funds. Much research has been conducted to explain closed-end equity fund premiums/discounts. Very little evidence, however, has been developed to explain why closed-end bond funds trade at premiums over or discounts from net asset values. In this paper, we hypothesize that short-term investors who seek a high current yield look to closed-end bond funds as a monthly income vehicle. In addition, closed-end funds allow individual investors with a short investment horizon to get in and out of the funds easily. We present evidence that there is a significant and positive relation between bond fund premiums and the dividend yield. We also examine whether closed-end bond fund premiums/discounts are related to other factors such as leverage, future investment performance, lifeboat provisions, anti-takeover provisions, and liquidity.
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