UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-Q

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Stone Harbor Emerging Markets Income Fund

(Exact name of registrant as specified in charter)

c/o Stone Harbor Investment Partners LP

31 West 52nd Street, 16th Floor

New York, NY 10019

(Address of principal executive offices) (Zip code)

Adam J. Shapiro, Esq.

c/o Stone Harbor Investment Partners LP

31 West 52nd Street, 16th Floor

New York, NY 10019

 (Name and address of agent for service)

With copies to:

 

Michael G. Doherty, Esq.

Ropes & Gray LLP

1211 Avenue of the Americas

Date of reporting period: February 28, 2015

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Item 1. Schedule of Investments.

 

Stone Harbor Emerging Markets Income Fund

Statement of Investments

February 28, 2015 (Unaudited)

						Maturity		Principal		Market Value
		Currency		Rate		Date		Amount*		(Expressed in U.S. $)
SOVEREIGN DEBT OBLIGATIONS ‐ 78.90%
Angola ‐ 0.29%
Republic of Angola		USD		7.000	%	08/16/2019		784,000		$	783,020	(1)
Argentina ‐ 11.75%
Republic of Argentina:
		USD		7.000	%	10/03/2015		20,428,290			20,380,982	(2)
		USD		7.000	%	04/17/2017		7,949,044			7,787,818	(2)
		USD		6.000	%	03/31/2023		2,500,000			3,000,000	(3)
											31,168,800
Brazil ‐ 14.62%
Nota Do Tesouro Nacional:
		BRL		10.000	%	01/01/2017		29,120,000			9,819,989
		BRL		10.000	%	01/01/2021		44,260,000			14,166,274
		BRL		10.000	%	01/01/2023		47,030,000			14,794,419
											38,780,682
Costa Rica ‐ 0.59%
Republic of Costa Rica:
		USD		4.250	%	01/26/2023		690,000			661,106	(1)
		USD		4.375	%	04/30/2025		500,000			462,187	(4)
		USD		7.000	%	04/04/2044		431,000			437,196	(4)
											1,560,489
Dominican Republic ‐ 6.26%
Dominican Republic:
		USD		7.500	%	05/06/2021		7,379,000			8,338,270	(1)(2)
		USD		5.875	%	04/18/2024		7,695,000			8,272,125	(2)(4)
											16,610,395
El Salvador ‐ 4.72%
Republic of El Salvador:
		USD		7.750	%	01/24/2023		829,000			933,143	(1)
		USD		8.250	%	04/10/2032		5,000,000			5,743,750	(1)(2)
		USD		7.650	%	06/15/2035		3,000,000			3,230,625	(1)(2)
		USD		7.625	%	02/01/2041		2,450,000			2,619,969	(1)(2)
											12,527,487
Ethiopia ‐ 0.27%
Federal Democratic Republic of Ethiopia		USD		6.625	%	12/11/2024		708,000			708,000	(4)
Ghana ‐ 0.48%
Republic of Ghana:
		USD		7.875	%	08/07/2023		1,000,000			980,000	(1)
		USD		8.125	%	01/18/2026		302,000			295,960	(4)
											1,275,960
Honduras ‐ 0.58%
Republic of Honduras		USD		8.750	%	12/16/2020		1,379,000			1,532,414	(1)
Indonesia ‐ 1.74%
Inter‐American Development Bank		IDR		0.000	%	08/20/2015		62,090,000,000			4,602,106	(5)

						Maturity		Principal		Market Value
		Currency		Rate		Date		Amount*		(Expressed in U.S. $)
Iraq ‐ 0.20%
Republic of Iraq		USD		5.800	%	01/15/2028		648,000		$	544,320	(1)
Ivory Coast ‐ 5.46%
Ivory Coast Government:
		USD		5.375	%	07/23/2024		467,000			447,736	(4)
		USD		5.750	%	12/31/2032		14,604,000			14,019,840	(1)(2)(6)
											14,467,576
Jamaica ‐ 1.11%
Jamaican Government		USD		7.625	%	07/09/2025		2,676,000			2,956,980	(2)
Mexico ‐ 6.87%
Mexican Bonos:
		MXN		6.250	%	06/16/2016		3,209,000			222,062
		MXN		8.000	%	06/11/2020		81,030,000			6,143,271
		MXN		6.500	%	06/10/2021		140,040,000			9,966,153
		MXN		10.000	%	12/05/2024		21,200,000			1,886,138
											18,217,624
Nigeria ‐ 0.68%
Republic of Nigeria		USD		6.375	%	07/12/2023		1,859,000			1,807,877	(2)(4)
Panama ‐ 0.23%
Republic of Panama		USD		8.125	%	04/28/2034		424,000			602,080
Russia ‐ 4.18%
Russian Federation:
		USD		5.000	%	04/29/2020		6,500,000			6,199,375	(1)(2)
		USD		7.500	%	03/31/2030		4,555,251			4,885,507	(1)(2)(6)
											11,084,882
South Africa ‐ 9.94%
Republic of South Africa:
		ZAR		13.500	%	09/15/2015		8,690,000			773,646
		ZAR		13.500	%	09/15/2016		8,690,000			822,304
		ZAR		8.000	%	12/21/2018		83,340,000			7,411,059
		ZAR		7.250	%	01/15/2020		192,550,000			16,651,329
		ZAR		6.750	%	03/31/2021		7,380,000			619,987
		ZAR		7.000	%	02/28/2031		920,000			71,483
											26,349,808
Turkey ‐ 6.74%
Republic of Turkey:
		TRY		8.300	%	06/20/2018		9,010,000			3,611,255
		TRY		10.500	%	01/15/2020		15,700,000			6,895,718
		TRY		7.100	%	03/08/2023		19,770,000			7,356,517
											17,863,490
Ukraine ‐ 0.91%
Ukraine Government:
		USD		6.875	%	09/23/2015		2,000,000			1,005,000	(2)(4)
		USD		6.250	%	06/17/2016		1,298,000			554,895	(1)
		USD		6.580	%	11/21/2016		2,016,000			861,840	(1)(2)
											2,421,735
Venezuela ‐ 1.28%
Republic of Venezuela:
		EUR		7.000	%	03/16/2015		1,606,000			1,752,265
		USD		13.625	%	08/15/2018		518,000			314,870	(1)

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Stone Harbor Emerging Markets Income Fund	Notes to Statement of Investments
	February 28, 2015 (Unaudited)

 

1.	ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Stone Harbor Emerging Markets Income Fund (the “Fund”) is a closed‐end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund is organized as a Massachusetts business trust pursuant to an Agreement and Declaration of Trust governed by the laws of The Commonwealth of Massachusetts (the “Declaration of Trust”). The Fund commenced operations on December 22, 2010. Prior to that, the Fund had no operations other than matters relating to its organization and the sale and issuance of 4,188 shares of beneficial interest (“Common Shares”) in the Fund to the Stone Harbor Investment Partners LP (the “Adviser” or “Stone Harbor”) at a price of $23.88 per share. The Fund’s common shares are listed on the New York Stock Exchange (the “Exchange”) and trade under the ticker symbol “EDF.”

The Fund’s investment objective is to maximize total return, which consists of income on its investments and capital appreciation. The Fund will normally invest at least 80% of its net assets (plus any borrowings made for investment purposes) in emerging markets securities. Emerging markets securities include fixed income securities and other instruments (including derivatives) that are economically tied to emerging market countries, which are denominated in the predominant currency of the local market of an emerging market country or whose performance is linked to those countries’ markets, currencies, economies or ability to repay loans. A security or instrument is economically tied to an emerging market country if it is principally traded on the country’s securities markets or if the issuer is organized or principally operates in the country, derives a majority of its income from its operations within the country or has a majority of its assets within the country.

The Fund is classified as “non‐diversified” under the 1940 Act. As a result, it can invest a greater portion of its assets in obligations of a single issuer than a “diversified” fund. The Fund may therefore be more susceptible than a diversified fund to being adversely affected by any single corporate, economic, political or regulatory occurrence.

The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its Statement of Investments.  The Fund is considered an investment company for financial reporting purposes under generally accepted accounting principles in the United States of America (“GAAP”). The policies are in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of the date of the Statement of Investments. Actual results could differ from those estimates.

Investment Valuation: Debt securities, including bank loans and linked notes, are generally valued at the mean between the bid and asked prices provided  by  independent  pricing  services  or  brokers  that  are  based  on  transactions  in  debt  obligations,  quotations  from  dealers,  market transactions in comparable securities and various other relationships between securities. Credit default swaps and interest rate swaps are priced by an independent pricing service based off of the underlying terms of the swap. Foreign currency options are priced by an independent pricing service based off of the underlying terms of the option. Equity securities for which market quotations are available are generally valued at the last sale price or official closing price on the primary market or exchange on which they trade. Publicly traded foreign government debt securities are typically traded internationally in the over‐the‐counter market and are valued at the mean between the bid and asked prices as of the close of business of that market. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value these investments at fair value as determined in accordance with the procedures approved by the Fund’s Board of Trustees (the “Board”). Short‐term obligations with maturities of 60 days or less are valued at amortized cost, which approximates market value. Money market mutual funds are valued at their net asset value. Foreign Currency positions including forward currency contracts are priced at the mean between the closing bid and asked prices at 4:00 p.m. Eastern time.

A three‐tier hierarchy has been established to measure fair value based on the extent of use of “observable inputs” as compared to “unobservable inputs” for disclosure purposes and requires additional disclosures about these valuations measurements. Inputs refer broadly to the assumptions that market participants would use in pricing a security. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the security developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the security developed based on the best information available in the circumstances.

The three‐tier hierarchy is summarized as follows:

Level 1    Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.

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Level 3   Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability and would be based on the best information available.

 

The following is a summary of the Fund’s investment and financial instruments based on the three‐tier hierarchy as of February 28, 2015:

 

* For detailed Country descriptions, see accompanying Statement of Investments.

** Other financial instruments are derivative instruments not reflected in the Statement of Investments. The derivatives shown in this table are reported at their unrealized appreciation/(depreciation) at measurement date, which represents the change in the contract’s value from trade date.

There were no transfers between Levels 1 and 2 during the period. It is the Fund’s policy to recognize transfers into and out of all levels at the end of the reporting period.

The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:

Investments in Securities		Balance as of November 30, 2014				Accrued discount/ premium				Realized Gain/(Loss)				Change in Unrealized Appreciation/ (Depreciation)				Purchases				Sales Proceeds				Balance as of February 28, 2015				Net change in unrealized appreciation/ (depreciation) attributable to Level 3 investments held at February 28, 2015
Bank Loans		$	754,703			$	—			$	—			$	251,567			$	—			$	—			$	1,006,270			$	251,567
Credit Linked
Notes			7,858,355				32,281				(39,530	)			(196,862	)			—				(414,005	)			7,240,239				(196,862	)
TOTAL		$	8,613,058			$	32,281			$	(39,530	)		$	54,705			$	—			$	(414,005	)		$	8,246,509			$	54,705

 

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

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In the event a Board approved independent pricing service is unable to provide an evaluated price for a security or the Adviser believes the price provided is not reliable, securities of the Fund may be valued at fair value as described above. In these instances the Adviser may seek to find an alternative independent source, such as a broker/dealer to provide a price quote, or by using evaluated pricing models similar to the techniques and models used by the independent pricing service. These fair value measurement techniques may utilize unobservable inputs (Level 3).

 

On at least a quarterly basis, the Adviser presents the factors considered in determining the fair value measurements and presents that information to the Board which meets at least quarterly.

The table below provides additional information about the Level 3 Fair Value Measurements as of February 28, 2015:

 

Security  Transactions  and  Investment  Income: Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex‐dividend date. Foreign dividend income is recorded on the ex‐dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. If applicable, any foreign capital gains taxes are accrued, net of unrealized gains, and are payable upon the sale of such investments.  The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Fund’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.

Foreign  Currency  Translation:  The  books  and  records  of  the  Fund  are  maintained  in  U.S.  dollars.  Investment  valuations  and  other  assets and liabilities initially expressed in foreign currencies are converted each business day into U.S. dollars based upon current exchange rates. Prevailing foreign exchange rates may generally be obtained at the close of the NYSE (normally, 4:00 p.m. Eastern time).

The portion of realized and unrealized gains or losses on investments due to fluctuations in foreign currency exchange rates is not separately disclosed and is included in realized and unrealized gains or losses on investments, when applicable.

Foreign Securities: The Fund may directly purchase securities of foreign issuers. Investing in securities of foreign issuers involves special risks not typically associated with investing in securities of U.S. issuers. The risks include possible revaluation of currencies, the ability to repatriate funds, less complete financial information about companies and possible future adverse political and economic developments. Moreover, securities of many foreign issuers and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. issuers.

Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that the Fund either delivers collateral or segregate assets in connection with certain investments (e.g., foreign currency exchange contracts, securities with extended settlement periods, and swaps) or certain borrowings (e.g., reverse repurchase agreements), the Fund will segregate collateral or designate on its books and records cash or other liquid securities having a value at least equal to the amount that is required to be physically segregated for the benefit of the counterparty. Furthermore, based on requirements and agreements with certain exchanges and third party broker‐dealers, each party has requirements to deliver/deposit cash or securities as collateral for certain investments. Cash collateral that has been pledged to cover obligations of the Fund is noted on the Statement of Investments.

Credit Linked Notes: The Fund may invest in credit linked notes to obtain economic exposure to high yield, emerging markets or other securities. Investments in a credit linked note typically provide the holder with a return based on the return of an underlying reference instrument, such as an emerging market bond. Like an investment in a bond, investments in credit linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. In addition to the risks associated with the underlying reference instrument, an investment in a credit linked note is also subject to the risk that the counterparty will be unwilling or unable to meet its obligations under the note.

Leverage: The Fund may borrow from banks and other financial institutions and may also borrow additional funds by entering into reverse repurchase agreements or the issuance of debt securities (collectively, “Borrowings”) in an amount that does not exceed 33 1/3% of the Fund’s total assets (including any assets attributable to any leverage used) minus the Fund’s accrued liabilities (other than Fund liabilities incurred for any leverage) (“Total Assets”) immediately after such transactions. It is possible that following such Borrowings, the assets of the Fund will decline due to market conditions such that this 33 1/3% limit will be exceeded. In that case, the leverage risk to Common Shareholders will increase.

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In a reverse repurchase agreement, the Fund sells to a financial institution a security that it holds with an agreement to repurchase the same security at an agreed‐upon price and date. A reverse repurchase agreement involves the risk that the market value of the security sold by the Fund may decline below the repurchase price of the security. The Fund will segregate assets determined to be liquid by the Adviser or otherwise cover its obligations under reverse repurchase agreements. Due to the short term nature of the reverse repurchase agreements, face value approximates fair value at February 28, 2015. This fair value is based on Level 2 inputs under the three‐tier fair valuation hierarchy described above. For the three months ended February 28, 2015, the average amount of reverse repurchase agreements outstanding was $122,932,152 at a weighted average interest rate of 0.65%.

 

Loan  Participations  and  Assignments:  The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, or any rights of set‐off against the borrower, and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.

The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set‐off between the lender and the borrower.

Leverage Risk: Leverage creates risks for Common Shareholders, including the likelihood of greater volatility of net asset value (“NAV”) per share and market price of, and dividends paid on, the Common Shares. There is a risk that fluctuations in the interest rates on any Borrowings held by the Fund may adversely affect the return to the Common Shareholders. If the income from the securities purchased with the proceeds of leverage is not sufficient to cover the cost of leverage, the return on the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to the Common Shareholders as dividends and other distributions will be reduced.

The Fund may choose not to use leverage at all times. The amount and composition of leverage used may vary depending upon a number of factors, including economic and market conditions in the relevant emerging market countries, the availability of relatively attractive investment opportunities not requiring leverage and the costs and risks that the Fund would incur as a result of leverage.

Credit and Market Risk: The Fund invests in high yield and emerging market instruments that are subject to certain credit and market risks. The yields of high yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The Fund’s investment in securities rated below investment grade typically involves risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Fund’s investment in non‐dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations. Investments in derivatives are also subject to credit and market risks.

2.	DERIVATIVE INSTRUMENTS

Risk  Exposure and  the  Use  of  Derivative  Instruments: The Fund’s investment objectives not only permit the Fund to purchase investment securities, they also allow the Fund to enter in various types of derivatives contracts. In doing so, the Fund will employ strategies in differing combinations to permit it to increase, decrease or change the level or types of exposure to market factors. Central to those strategies are features inherent to derivatives that may make them more attractive for this purpose than equity or debt securities: they require little or no initial cash investment; they can focus exposure on only certain selected risk factors; and they may not require the ultimate receipt or delivery of the underlying security (or securities) to the contract. This may allow the Fund to pursue its objectives more quickly and efficiently than if the Fund were to make direct purchases or sales of securities capable of effecting a similar response to market factors.

Market Risk Factors: In pursuit of its investment objectives, the Fund may seek to use derivatives to increase or decrease its exposure to the following market risk factors, among others:

Interest Rate Risk. Interest rate risk refers to the fluctuations in value of fixed‐income securities resulting from the inverse relationship between price and yield. For example, an increase in general interest rates will tend to reduce the value of already issued fixed‐income investments, and a decline in general interest rates will tend to increase their value. In addition, debt securities with longer maturities  that tend to have higher yields are subject to potentially greater fluctuations in value from changes in interest rates than obligations with shorter maturities.

Credit Risk. Credit risk relates to the ability of the issuer to meet interest and principal payments, or both, as they come due. In general, lower‐grade, higher‐yield bonds are subject to credit risk to a greater extent than lower‐yield, higher‐grade bonds.

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Foreign Exchange Rate Risk. Foreign exchange rate risk relates to the change in the U.S. dollar value of a security held that is denominated in a foreign currency. The U.S. dollar value of a foreign currency denominated security will decrease as the dollar appreciates against the currency, while the U.S. dollar value will increase as the dollar depreciates against the currency.

 

Equity Risk. Equity risk relates to the change in value of equity securities as they relate to increases or decreases in the general market.

 

The Fund’s use of derivatives can result in losses due to unanticipated changes in these risk factors and the overall market. In instances where the Fund is using derivatives to decrease, or hedge, exposures to market risk factors for securities held by the Fund, there are also risks that those derivatives may not perform as expected resulting in losses for the combined or hedged positions.

Derivatives may have little or no initial cash investment relative to their market value exposure and therefore can produce significant gains or losses in excess of their cost. This use of embedded leverage allows the Fund to increase its market value exposure relative to it net assets and can substantially increase the volatility of the Fund’s performance.

Additional associated risks from investing in derivatives also exist and potentially could have significant effects on the valuation of the derivative and the Fund. Typically, the associated risks are not the risks that the Fund is attempting to increase or decrease exposure to, per its investment objectives, but are the additional risks from investing in derivatives.

Examples of these associated risks are liquidity risk, which is the risk that the Fund will not be able to sell or close out the derivative in a timely manner, and counterparty credit risk, which is the risk that the counterparty will not fulfill its obligation to the Fund. Associated risks can be different for each type of derivative and are discussed by each derivative type below and in the notes that follow.

Forward  Foreign  Currency  Contracts:  The  Fund  may  engage  in  currency  transactions  with  counterparties  to  hedge  the  value  of  portfolio securities denominated in particular currencies against fluctuations in relative value, to gain or reduce exposure to certain currencies or to generate income or gains. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The contract is marked‐to‐market daily, and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is extinguished, through either delivery or offset by entering into another forward foreign currency contract, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was extinguished.

Foreign Currency Options: The Fund may write or purchase foreign currency options. Purchasing foreign currency options gives the Fund the right, but not the obligation to buy or sell the currency and will specify the amount of currency and a rate of exchange that may be exercised by a specified date. These options may be used as a short or long hedge against possible variations in foreign exchange rates or to gain exposure to foreign currencies.

The Fund had the following transactions in written options during the three months ended February 28, 2015:

 

		Written Put Options
		Notional				Proceeds
Outstanding, November 30, 2014		$	—			$	—
Positions opened			10,000,000				310,000
Exercised			—				—
Expired			—				—
Closed			—				—
Outstanding, February 28, 2015		$	10,000,000			$	310,000
Market Value, February 28, 2015						$	(109,738	)

 

Swap Agreements: The Fund may invest in swap agreements. Swap agreements are bilaterally negotiated agreements between the Fund and a counterparty to exchange or swap investment cash flows, assets, or market‐linked returns at specified, future intervals. Swap agreements are privately negotiated in the over the counter market (“OTC swaps”) or may be executed in a multilateral or other trade facility platform, such as a registered exchange (“centrally cleared swaps”). In a centrally cleared swap, immediately following execution of the swap agreement, the swap agreement is novated to a central counterparty (the “CCP”) and the Fund’s counterparty on the swap agreement becomes the CCP. The Fund may enter into credit default swaps, interest rate swaps, total return swaps on individual securities or groups or indices of securities for hedging, investment or leverage purposes. In connection with these agreements, securities or cash may be identified as collateral or margin in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default or bankruptcy/insolvency.

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Credit Default Swap Contracts: The Fund may enter into credit default swap contracts for hedging purposes to gain market exposure or to add leverage to its portfolio. When used for hedging purposes, the Fund would be the buyer of a credit default swap contract. In that case, the Fund would be entitled to receive the par (or other agreed upon) value of a referenced debt obligation, index or other investment from the counterparty to the contract in the event of a default by a third party, such as a U.S. or foreign issuer, on the referenced debt obligation. In return, the Fund would pay to the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no event of default occurs, the Fund would have spent the stream of payments and received no benefit from the contract. When the Fund is the seller of a credit default swap contract, it receives the stream of payments but is obligated to pay upon default of the referenced debt obligation. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total assets, the Fund would be subject to investment exposure on the notional amount of the swap.

 

In addition to the risks applicable to derivatives generally, credit default swaps involve special risks because they may be difficult to value, are highly susceptible to liquidity and credit risk and generally pay a return to the counterparty only in the event of an actual default by the issuer of the underlying obligation, as opposed to a credit downgrade or other indication of financial difficulty.

Interest Rate Swap Contracts: Interest rate swap contracts involve the exchange by the Fund with another party for their respective commitment to pay or receive interest on the notional amount of principal. Certain forms of interest rate swap agreements may include: (i) interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”, (ii) interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor”, (iii) interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels, (iv) callable interest rate swaps, under which the buyer pays an upfront fee in consideration for the right to early terminate the swap transaction in whole, at zero costs and at a predetermined date and time prior to the maturity date, (v) spreadlocks, which allow the interest rate swap users to lock in the forward differential (or spread) between the interest rate swap rate and a specified benchmark, or (vi) basis swaps, under which two parties can exchange variable interest rates based on different segments of money markets.

3.	UNREALIZED APPRECIATION AND DEPRECIATION ON INVESTMENTS (TAX BASIS)

At February 28, 2015 the aggregate gross unrealized appreciation and depreciation of investments for federal income purposes were as follows:

 

 

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Item 2. Controls and Procedures.

(a)       The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) are effective as of a date within 90 days of the filing date of this Report.

(b)       There was no change in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 3. Exhibits.

Separate certifications for the registrant’s principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as Exhibit 99.CERT.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.