BALTIMORE, Aug. 17, 2011 /PRNewswire/ -- T. Rowe Price (NASDAQ-GS: TROW) has introduced a Floating Rate Fund (PRFRX) for individual investors. The new no-load mutual fund represents a second addition to T. Rowe Price's lineup of bond fund offerings this year, following the launch of the Emerging Markets Local Currency Bond Fund (PRELX). Seeking high income, the T. Rowe Price Floating Rate Fund offers long-term investors potentially attractive yields and some protection against interest rate risk by investing in loans to below investment-grade companies.
According to a Forrester Research Inc. survey commissioned by T. Rowe Price in the second quarter of 2011, 56 percent of investors do not understand the inverse relationship between bond prices and interest rates -- that is, when rates rise, bond prices fall and vice versa.
"Investors need to have well-informed expectations of their bond portfolios, so they can invest appropriately for their time horizon," said Stuart Ritter, a certified financial planner with T. Rowe Price. "They should understand that their bond holdings do come with particular risks, one of them being interest rate risk. The Floating Rate Fund has more credit risk than a fund investing in investment-grade securities, but it also can be used to manage interest rate risk and provide higher yields." (Credit risk pertains to a bond issuer's ability to make timely payments on debt obligations).
The Floating Rate Fund invests in floating rate loans or leveraged loans, which have interest rates that reset either quarterly or monthly, usually to a certain percentage above the London Interbank Offered Rate or LIBOR. These loans are arranged or syndicated by banks for companies that usually have a significant level of debt relative to equity and whose loans are rated below investment grade in terms of creditworthiness. Often, the loans are used for recapitalizations, acquisitions, leveraged buyouts, and refinancings.