Risks Related To Floating-Rate Investments

Posted on September 25th, 2014 at 8:04 AM

From the Desk of Jim Eccleston at Eccleston Law Offices

Floating-rate investments could be an effective way to diversify fixed-income portfolios in today’s low-yield environment. However, investors need to understand their risks.

Many floating-rate mutual funds utilize the single asset class strategy, investing almost exclusively in debt instruments such as bank loans. While bank loans can offer the benefit of low price sensitivity to interest rates, dominating a portfolio with a single asset class may introduce other risks to the portfolio. For example, the bank loans may be from a high-yield (“junk”) asset class, which generally carries a higher degree of credit risk than investment-grade corporate bonds.

A truly diversified approach would incorporate different asset classes offering varying degrees of protection against price volatility due to changing rates. Examples include high-yield corporate bonds, investment-grade corporate floating-rate bonds, asset-backed securities or even Treasury bills.

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Related Attorneys: James J. Eccleston

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