Interest rates are volatile. Are you sinking or floating?
May 7, 2013
Floating-rate securities typically generate income that adjusts to interest rate movements.
Generally speaking, floating-rate securities can provide investors with:
Relative price stability if interest rates rise…
One of the unique features of floating-rate securities is their response to prevailing market rates. While prices of traditional bonds tend to fluctuate in response to changes in interest rates, prices of floating-rate securities have historically remained relatively stable.
…along with increased income potential
Because coupon payments on floating-rate securities are tied to another market-based interest rate, the level of income floating-rate securities pay also increases as that market rate climbs. If interest rates were to decline, however, so too would the amount of income these securities produce. Therefore, it is important to note that a certain level of income is not guaranteed and that the potential for loss of principal exists as well.
|When interest rates...
||Traditional fixed-rate bonds
Source: Frank J. Fabozzi, The Handbook of Fixed Income Securities, (New York: McGraw-Hill, 2005).
The chart above is for illustrative purposes only and is not representative of the performance of any specific investment. Past performance does not guarantee future results. Information is as of the date indicated and subject to change.
Unlike conventional bonds, this combination provides the potential for floating-rate instruments to help offset some of the volatility experienced in more traditional bond allocations if interest rates do begin to climb from their current levels (see chart below).
Source: Board of Governors of the Federal Reserve System. April 2013. Most recent data available.
The 10-Year Treasury constant maturity rate represents the interest rate the U.S. government would pay on top of principal to the bondholder once 10 years have passed.
Speak with your financial advisor to learn more about floating-rate securities and to determine if they are a suitable product for you.
Views expressed were current as of May 2013, are subject to change, and may not reflect the manager's current views.
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus and its summary prospectus, which may be obtained by visiting delawarefunds.com/literature or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
IMPORTANT RISK CONSIDERATIONS
Investing involves risk, including the possible loss of principal.
Fixed income securities can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder a issuer’s ability to make interest and principal payments on its debt.
The Fund may also be subject to prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.
High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.
The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult for the Fund to obtain precise valuations of the high yield securities in its portfolio.
International investments entail risks not ordinarily associated with US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.
Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
The Funds may invest in derivatives, which may involve additional expenses and are subject to risk, including the risk that an underlying security or securities index moves in the opposite direction from what the portfolio manager anticipated. A derivatives transaction depends upon the counterparties’ ability to fulfill their contractual obligations.
Because the Fund may invest in bank loans and other direct indebtedness, it is subject to the risk that the fund will not receive payment of principal, interest, and other amounts due in connection with these investments, which primarily depend on the financial condition of the borrower and the lending institution.
Diversification may not protect against market risk.
Not FDIC Insured | No Bank Guarantee | May Lose Value