Bank Loan

Bank loan mutual funds and ETFs typically invest in loans issued by... Bank loan mutual funds and ETFs typically invest in loans issued by banks or other financial institutions to companies that use them for general purposes or meet a specific purpose, including refinancing existing debt or funding an acquisition. Often, these loans carry meaningful credit risk, aka the ability of the borrower to pay interest and principal on time, as they are rated below investment-grade by credit rating companies like Moody’s or Standard & Poor's (S&P). Although these loans can mitigate their credit risk due to their seniority in capital structure - aka if borrower goes bankrupt, these loans can be repaid before certain other debt - there are several other factors that could negatively impact a loan’s value. Bank loans are generally floating rate debt. As such, interest payments fluctuate based on an underlying short-term benchmark, such as the London Inter-Bank Offer Rate (LIBOR), which major global banks use to lend to each other. If the benchmark rises, interest payments will increase. On the other hand, if the benchmark rate falls, interest payments will decrease. As a result, investors with above-average risk appetite tend to purchase this type of funds and ETFs as they offer higher interest payments, compared to low-risk government bonds, to compensate for their relatively high credit risk. Last Updated: 05/26/2023 View more View less

Bank loan mutual funds and ETFs typically invest in loans issued by banks or other financial institutions to companies that use them for general purposes or meet a specific purpose, including refinancing existing... Bank loan mutual funds and ETFs typically invest in loans issued by banks or other financial institutions to companies that use them for general purposes or meet a specific purpose, including refinancing existing debt or funding an acquisition. Often, these loans carry meaningful credit risk, aka the ability of the borrower to pay interest and principal on time, as they are rated below investment-grade by credit rating companies like Moody’s or Standard & Poor's (S&P). Although these loans can mitigate their credit risk due to their seniority in capital structure - aka if borrower goes bankrupt, these loans can be repaid before certain other debt - there are several other factors that could negatively impact a loan’s value. Bank loans are generally floating rate debt. As such, interest payments fluctuate based on an underlying short-term benchmark, such as the London Inter-Bank Offer Rate (LIBOR), which major global banks use to lend to each other. If the benchmark rises, interest payments will increase. On the other hand, if the benchmark rate falls, interest payments will decrease. As a result, investors with above-average risk appetite tend to purchase this type of funds and ETFs as they offer higher interest payments, compared to low-risk government bonds, to compensate for their relatively high credit risk. Last Updated: 05/26/2023 View more View less