The yield spread between the investment rate and the borrowing rate is passed through to owners of the fund in the form of higher dividends. Leveraging funds increases risk levels, however, as the inherent volatility of the net asset value increases by the amount of leverage. There is also the risk that the short-term borrowing rate could actually increase to levels above the invested rate, a situation known as an inverted yield curve. While this occurrence is rare, it nevertheless is a risk. Leverage is neither good nor bad, it is just an additional component of fund analysis and must be properly understood to evaluate a fund's prospects.
Discounts enhance yield.
It is the current market value of all of the securities that a fund owns, minus any outstanding liabilities of the fund company, all divided by the number of outstanding shares. This price is determined by an interaction of buyers and sellers, and may be more or less than the original cost. Lack of advertising, research and general investor interest, along with investor sentiment issues are probably the biggest reasons behind why some closed-end funds trade at discounts to their underlying portfolio values. Investor sentiment for the particular sector of investment style of a closed-end fund can also push a fund to a discount or premium. If investors believe that a fund's investment objective is likely to underperform others or decline significantly, they may be willing to sell the fund at a deep discount to avoid larger future losses.