Initial Public Offering

• You can only buy shares directly from a closed-end fund during the fund's initial public offering. An IPO occurs when the fund first comes into existence and a fixed number of shares in the fund are made publicly available on the stock market. If you buy shares during the IPO, you can sell those shares to other investors, but you cannot redeem your shares by selling the shares back to the fund company in the same way that you can redeem mutual fund shares. However, some funds do periodically buy back shares at certain intervals.
  
  

Holdings

• Mutual funds and other types of investment companies have to invest a certain amount of money in cash-equivalent assets that fund managers can liquidate when shareholders redeem their holdings. Since shareholders typically cannot redeem shares in closed-end funds, the Securities and Exchange Commission allows these funds to invest heavily in illiquid, long-term securities that fund managers cannot easily sell. Each fund has a stated fund strategy and the funds raised during the IPO are used to buy securities that enable the fund to meet its stated objective.
  
  

Debt Securities

• Debt securities are loans that are sold on the open market. Bonds are the most well-known type of debt security, and governments and corporations regularly issue bonds to raise short-term capital. Bondholders receive regular interest payments from bond issuers, which means debt securities appeal to people seeking supplementary income. Other types of debt securities include certificates of deposit and commercial paper. Shareholders of a closed-end fund receive fund dividends comprising interest payments from the underlying securities.
  
  

Risk Factors

• People buying closed-end debt funds are exposed to interest rate risk. If interest rates on newly issued bonds rise, investors can only sell shares of the fund at a discount because investors do not want to pay full price for low-rate bonds when other bonds paying higher returns are available. Additionally, bondholders can lose money if any of the bond issuers become insolvent and fail to honor debt obligations. Funds containing federally issued bonds are viewed as low-risk but pay much lower returns than higher-risk corporate bond funds.