June 4, 2012

With the T. Rowe Price High Yield Fund closing to new investors at the end of April 2012, prospective investors have been increasingly interested in the T. Rowe Price Floating Rate Fund as an attractive alternative. Both portfolios are overseen by the same team of analysts and portfolio managers and are constructed using disciplined research and analytical processes to help manage risk. But there are some important differences between high yield bonds and bank loans, which are sometimes called leveraged loans and also tend to be issued by below investment-grade companies. We believe that bank loans' seniority to traditional debt and equity securities, floating rate feature, and favorable outlook during an economic recovery make them a good income-producing investment worth considering.

What do the T. Rowe Price High Yield and Floating Rate Funds have in common?
  • The same portfolio managers and analysts work on both funds and have created a consistent, disciplined investment process. Holistic, in-depth credit research and quantitative analysis help facilitate robust portfolio construction and effective risk management.
  • Floating rate loans—also referred to as bank loans or leveraged loans—are typically issued by below investment-grade companies, creating considerable issuer overlap (over 80% as of March 31, 2012) between the high yield and bank loan strategies.
  • While the Floating Rate Fund began operations in July 2011, our dedicated institutional strategy launched in January 2008. In addition, T. Rowe Price has been investing in bank loans since February 2002, when they were first purchased for the High Yield Fund.
What distinguishes floating rate loans from other fixed income investments?
Portfolio Characteristics as of April 30, 2012 High Yield Fund Floating Rate Fund
Weighted Average Maturity* 6.69 years 5.15 years
Interest Rate Duration** 3.64 years 0.48 years
Number of Holdings 583 238
30-Day SEC Dividend Yield 6.17% 3.31%
*Weighted average maturity is an average of the maturities of the underlying bonds, with each bond's maturity weighted by the percentage of fund assets it represents.
**Duration is a calculation that seeks to measure the price sensitivity of a bond fund to changes in interest rates. In general, a higher average maturity or duration indicates that a fund is more sensitive to interest rates.
Average Annual Compound Total Return
Periods Ended March 31, 2012         Since Inception Expense Ratio
  1 Year 3 Years 5 Years 10 Years (7/29/11) As of 5/31/12
T. Rowe Price High Yield Fund 5.05% 21.10% 7.06% 8.40% - 0.74%
T. Rowe Price Floating Rate Fund - - - - 2.38% *See Note
*Note about the fund's expense ratio: To protect the interests of shareholders, T. Rowe Price Associates will waive its fees and/or bear any expenses that would cause the fund's expense ratio to exceed 0.85%. This contractual expense limitation expires on 09/30/2013.

Current performance may be higher or lower than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares. Click here for the funds' most recent month-end performance.
Figures include changes in principal value, reinvested dividends, and capital gain distributions.

  • Due to their floating rate feature—which means their coupons typically reset every three months—bank loans are less sensitive to changes in interest rates than most alternative fixed income asset classes. So while the maturity of the Floating Rate Fund is similar to that of the High Yield Fund, the duration is significantly shorter, as shown in the Portfolio Characteristics table, which can help protect against potential principal losses derived during periods of rising rates.
  • Since bank loans and high yield bonds are mostly issued by below investment-grade companies, they are subject to increased credit and liquidity risk and can be more volatile than investment-grade bonds. Because they are contractual in nature, bank loans could be less liquid than high yield bonds in some market environments.
  • Similar to high yield bonds, leveraged loans tend to underperform during periods of economic weakness and are considered speculative because, in many cases, they are issued by borrowing companies with more debt on their balance sheets than their investment-grade counterparts.
  • Bank loans typically outperform high yield bonds during periods of market stress, as these securities are at the top of a company's capital structure and are generally secured by assets.
Lower default rates and a favorable outlook make bank loans a good option for income.
  • Leveraged loans have had a better recovery rate historically than high yield bonds in cases of default or bankruptcy because they are senior to traditional fixed income and equity securities.
  • The outlook for the loan market remains solid from an underlying corporate standpoint. The fundamentals for the asset class have greatly improved over the last several years as borrowing companies have taken advantage of low interest rates to shore up their balance sheets, grow earnings, and generate better cash flows.
  • Bank loans tend to perform better when corporate fundamentals are sound and the economy is growing. They can help increase a portfolio's diversification and can provide an indirect hedge against inflation in a rising interest rate environment.
  • T. Rowe Price's bank loan strategy team believes there is considerable value among leveraged loans based on today's loan price levels, current yields, and their yield advantage over Treasuries with comparable maturities.