Leverage: An Important Tool

by David Jenyns on November 3, 2008

Bonds or debentures and preferred stocks are the instruments that provide leverage. So strong was the feeling against leverage that the issuance of senior securities by open-end investment companies was forbidden in the Investment Company Act, although bank loans might be contracted.

Most of the older closed-end investment companies were financed through issues of either debentures or preferred stock, or both, in addition to common stock. American investment companies and their sponsors resorted to comparisons with British experience, where multiple-security investment companies were almost universal. Whereas American companies, whatever the amount of senior securities outstanding, had only a small fraction of their investments in high-grade bonds and preferred stocks, British companies generally kept 50 percent or more of their assets in senior securities.

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