What You Need to Know about Bank Loans
Risks to Consider: Investing involves risk, including the possible loss of principal. The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall. Bonds may also be subject to call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may carry greater risks than higher-rated bonds. Floating-rate loans are lower-rated, higher-yielding instruments, which are subject to increased risk of default and can potentially result in loss of principal. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan's value. No investing strategy can overcome all market volatility or guarantee future results.
Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.
The bank loan market may not perform in a similar manner under similar conditions in the future.
Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
Correlation is a statistic that measures the degree of association between two variables.
Coupon is the contractual interest obligation a bond or debenture issuer covenants to pay to its debt holders.
The quoted spread above the reference rate for a bank loan tends to vary based on factors such as issuer credit quality and time to maturity. The spread is an indication of risk, as investors earn a higher rate than the reference rate to compensate them for the risk of holding a security. Loans of lower credit quality tend to have higher spreads above the reference rate.
Yield is the annual interest received from a bond and is typically expressed as a percentage of the bond's market price.
A senior lien is the first lien placed upon property at a time before other liens. A senior lien is higher in priority compared to other liens. It will be paid before other liens are paid.
A basis point is one one-hundredth of a percentage point.
The default rate measures the percentage of issuers in a given asset class that failed to make scheduled interest or principal payments in the prior 12 months. The default rate can also be par-weighted, meaning that it measures the dollar value of defaults (based on par value of issued securities) as a percentage of the overall market.
The London Interbank Offered Rate, or LIBOR, is a short-term interest rate that banks charge one another and that is generally representative of the most competitive and current cash rates available. A LIBOR floor is the minimum interest rate on a debt instrument. The floor and the credit spread may comprise the yield on an instrument.
A fund's net asset value (NAV) represents its per-share price. NAV is calculated by dividing a fund's total net assets by its number of shares outstanding.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.