Currency trading guide – The converse also must be true.
If the earnings of an investment company do not cover the interest or preferred dividend requirements or if the prices of the portfolio securities decline, the impact will be heaviest on the common stock. 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. The issuance of senior securities by closed-end companies is rigorously circumscribed by the act. To illustrate the significance of leverage, let us assume that an investment company has net assets of $2 million. Although earnings on the total invested capital of $1.8 million were equivalent to only a 6 per cent annual rate, because only 4 per cent was paid on the borrowed funds, earnings on the common stock would be equivalent to 8.
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