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Closed End Bond Funds: Added 50 First Trust Intermediate Duration And Income Fund (FPF) At $21.53

This post is an excerpt from a blog published earlier today: NVS, BHLB/ AGY Bond Redemption/Bought 50 RRST at $7.4-Lotto/Added 50 FPF at $21.53-Roth IRA

Added 50 FPF at $21.53 Roth IRA (see Disclaimer): This is an average down.

Snapshot of Trade:

History Roth IRA:

Security Description: The First Trust Intermediate Duration Preferred & Income Fund (NYSE:FPF) is a leveraged CEF that invests in bonds and preferred stocks with the objective of generating current income and managing duration of between 3 to 8 years, excluding the duration adjustment for leverage which increases duration.

CEFConnect Page for FPF

Data on Date of Trade 11/17/14:

Net Asset Value Per Share: $24.35

Market Price Per Share: $21.62

Discount: -11.21%

Discount at $21.53= -11.58%

Average 1 Year Discount= -9.62%

The fund started in May 2013.

Credit quality as of 9/30/14:

First Trust Intermediate Duration Preferred & Income Fund (FPF)

As of 9/30/14, the weighted average duration was 4.34 years; the fund had a 73.5% weighting in fixed-to-floating rate securities; and the total U.S. weighting was 49.18%.

The owner of this fund is exposed to both currency and country risk.

In 2013, the fund classified 65.15% of its distributions as qualified: Tax Letter Those distributions would necessarily be from equity preferred stocks (sometimes called traditional preferred stocks) and some European hybrids. I noticed in the semi-annual report that the fund owned several ING hybrids that pay qualified dividends. Stocks, Bonds & Politics: ING Hybrids: Links in one Post I no longer own any ING or Aegon Hybrids.

Semi-Annual Report (period ending 4/30/14)

Dividends: The fund is currently paying a monthly distribution of $.1575 per share, increased from $.1525 earlier this year. Distributions At a total cost per share of $21.53, and assuming a continuation of the $.1575 rate which is in no way assured, the yield would be about 8.78%.

Prior Trades: In the Roth IRA, I have bought 150 shares at higher prices: Item # 1 Paired Trade Roth IRA to Increase Cash Flow: Sold 50 MSPRA at $20.22 and Bought 50 FPF at $22.07 (4/26/14 Post). I apparently did not discuss the 100 share add at $22.25, made on 7/25/14, which is shown in the preceding history snapshot.

I flipped a 100 FPF share lot in a taxable account as part of a pared trade with the equity preferred floater MSPRA:

Paired Trade: Sold 100 MSPRA at $20.21 and Bought 100 FPF at $22.12 (April 26. 2014 Post)($203.08 total return on MSPRA)

Item # 4 Sold 100 FPF at $22.83/Bought 100 MSPRA at $20.19-Roth IRA (7/5/14 Post)($87.05 total return for FPF-2 month holding period)

Those paired trades worked in that FPF has fallen from its disposition price of $22.83 to $21.53 or a 5.69% decline, while MSPRA has declined slightly from its purchase price at $20.19 to $20.01 or down less than 1%.

{I discussed MSPRA in a recent SA Instablog: Equity Preferred Floating Rate Stocks: Added To MSPRA At $19.87 - South Gent | Seeking Alpha)

Rationale: The primary reason is to generate tax free income in the Roth IRA and to hopefully escape at some point with a profit on the shares. At the moment, I am about a $100 in the hole with most of that loss associated with the 100 share buy at $22.25. At 8.78%, money doubles in about 8.24 years: Estimate Compound Interest

If I can generate an 8% annualized compounded return with reinvestment of the dividends, which will be tax free in the Roth IRA, then I would regard this investment as successful.

I have been adding to my bond CEFs recently based in part on the decline in both inflation and inflation expectations, the ultimate and primary enemy of bond investors. Another reason is the .01% yield of my money market funds used as the funding source for these purchases.

The break-even spread priced into the ten year TIP closed today at 1.86%, the average annual CPI necessary for the buyer of the 10 year TIP to break-even with the buyer of the ten year non-inflation protected security. The break-even spread is commonly referenced as the market's inflation forecast.

The break-even spread is calculated by subtracting the yield of the TIP

Daily Treasury Real Yield Curve Rates

From the Yield of the Non-inflation protected treasury

Daily Treasury Yield Curve Rates

The 10 year TIP break-even spread has been trending down.

Risks: FPF has the usual risks associated with leveraged bond CEFs that include interest rate, lost opportunity, credit and normal CEF risks. It is always frustrating when the discount to net asset value remains relatively stable and the market price sinks after purchase creating a wider discount, or the discount widens substantially more than the percentage decrease in net asset value. The potential benefit is that the discount may decrease after purchase as the net asset value per share goes up.

The fund's exposure to foreign securities add currency and country risks to the mix. U.S.D. priced funds that own foreign securities will reflect the negative, unhedged foreign currency declines. Both the Euro and the British Pound have been weak against the USD for several weeks now.

USD/EUR Interactive Stock Chart

USD/GBP Interactive Stock Chart

An owner of a U.S. bond fund that owns foreign securities priced in their respective local currencies would want the value of the USD to be falling after purchase rather than gaining against the applicable foreign currencies. Many of the U.S. bond funds that own investment grade foreign bonds have concentrations in Euro and British Pound priced securities.

Leverage, of course, adds risks in addition to potential benefits. The potential benefits are that the securities bought with borrowed money go up in value as the fund earns a spread that increases its funds available for distribution compared to an unleveraged fund investing in the same or similar securities. The downside risk is that the securities bought with borrowed money go down in price as interest rates rise, including the cost of short term borrowings, which can also cause the discount to widen as individual investors flee en masse. Needless to say, there is no free lunch in today's abnormally low interest rate environment for a 8.78% yield.

Disclosure: The author is long FPF.

Additional disclosure: Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.