5. Swap Contracts
The Fund may enter into interest rate
swap contracts, index swap contracts and credit default swap (CDS) contracts in
accordance with its investment objectives. The Fund may use interest rate swaps
to adjust the Fund's sensitivity to interest rates or to hedge against changes
in interest rates. Index swaps may be used to gain exposure to markets that the
Fund invests in, such as the corporate bond market. The Fund may also use index
swaps as a substitute for futures or options contracts if such contracts are not
directly available to the Fund on favorable terms. The Fund may enter into CDS
contracts in order to hedge against a credit event, to enhance total return or
to gain exposure to certain securities or markets.
An interest rate swap involves payments
received by the Fund from another party based on a variable or floating interest
rate, in return for making payments based on a fixed interest rate. An interest
rate swap can also work in reverse with the Fund receiving payments based on a
fixed interest rate and making payments based on a variable or floating interest
rate. Interest rate swaps may be used to adjust the Fund's sensitivity to
interest rates or to hedge against changes in interest rates. Periodic payments
on such contracts are accrued daily and recorded as unrealized
appreciation/depreciation on swap contracts. Upon periodic payment/receipt or
termination of the contract, such amounts are recorded as realized gains or
losses on swap contracts.
Index swaps involve commitments to pay
interest in exchange for a market linked return based on a notional amount. To
the extent the total return of the security, instrument or basket of instruments
underlying the transaction exceeds the offsetting interest obligation, the Fund
will receive a payment from the counterparty. To the extent the total return of
the security, instrument or basket of instruments underlying the transaction
falls short of the offsetting interest obligation, the Fund will make a payment
to the counterparty. The change in value of swap contracts outstanding, if any,
is recorded as unrealized appreciation or depreciation daily. A realized gain or
loss is recorded on maturity or termination of the swap contract.
A CDS contract is a risk-transfer
instrument through which one party (purchaser of protection) transfers to
another party (seller of protection) the financial risk of a credit event, as it
relates to a particular reference security or basket of securities (such as an
index). In exchange for the protection offered by the seller of protection, the
purchaser of protection agrees to pay the seller of protection a periodic amount
at a stated rate that is applied to the notional amount of the CDS contract. In
addition, an upfront payment may be made or received by the Fund in connection
with an unwinding or assignment of a CDS contract. Upon the occurrence of a
credit event, the seller of protection would pay the par (or other agreed-upon)
value of the referenced security (or basket of securities) to the
counterparty.
During the period ended February 29,
2008, the Fund entered into CDS contracts as a purchaser and seller of
protection. Periodic payments (receipts) on such contracts are accrued daily and
recorded as unrealized losses (gains) on swap contracts. Upon payment (receipt),
such amounts are recorded as realized losses (gains) on swap contracts. Upfront
payments made or received in connection with CDS contracts are amortized over
the expected life of the CDS contracts as realized losses (gains) on swap
contracts. The change in value of CDS contracts is recorded as unrealized
appreciation or depreciation daily. A realized gain or loss is recorded upon a
credit event (as defined in the CDS agreement) or the maturity or termination of
the agreement.
CDS may involve greater risks than if
the Fund had invested in the referenced obligation directly. CDS are subject to
general market risk, liquidity risk, counterparty risk and credit risk. If the
Fund enters into a CDS contract as a purchaser of protection and no credit event
occurs, its exposure is limited to the periodic payments previously made to the
counterparty.
Because there is no organized market
for swap contracts, the value of open swaps may differ from that which would be
realized in the event the Fund terminated its position in the agreement. Risks
of entering into these agreements include the potential inability of the
counterparty to meet the terms of the contracts. This type of risk is generally
limited to the amount of favorable movement in the value of the underlying
security, instrument, or basket of instruments, if any, at the day of default.
Risks also arise from potential losses from adverse market movements and such
losses could exceed the unrealized amounts shown on the schedule of investments.
6. Securities
Lending
The Fund, along with other funds
in the Delaware Investments
®
Family of Funds, may lend its securities
pursuant to a security lending agreement (Lending Agreement) with Mellon Bank
N.A. (Mellon). With respect to each loan, if the aggregate market value of the
collateral held on any business day is less than the aggregate market value of
the securities which are the subject of such loan, the borrower will be notified
to provide additional collateral not less than the applicable collateral
requirements. Cash collateral received is invested in a Collective Trust
established by Mellon for the purpose of investment on behalf of clients
participating in its securities lending programs. The Collective Trust invests
in fixed income securities, with a weighted average maturity not to exceed 90
days, rated in one of the top three tiers by Standard & Poor's Ratings Group
or Moodys Investors Service, Inc. or repurchase agreements collateralized by
such securities. The Fund can also accept U.S. government securities and letters
of credit (non-cash collateral) in connection with securities loans. In the
event of default or bankruptcy by the lending agent, realization and/or
retention of the collateral may be subject to legal proceedings. In the event
the borrower fails to return loaned securities and the collateral received is
insufficient to cover the value of the loaned securities and provided such
collateral shortfall is not the result of investment losses, the lending agent
has agreed to pay the amount of the shortfall to the Fund, or at the discretion
of the lending agent, replace the loaned securities. The Fund continues to
record dividends or interest, as applicable, on the securities loaned and is
subject to change in value of the securities loaned that may occur during the
term of the loan. The Fund has the right under the Lending Agreement to recover
the securities from the borrower on demand. With respect to security loans
collateralized by non-cash collateral, the Fund receives loan premiums paid by
the borrower. With respect to security loans collateralized by cash collateral,
the earnings from the collateral investments are shared among the Fund, the
security lending agent and the borrower. The Fund records security lending
income net of allocations to the security lending agent and the borrower.
At February 29, 2008, the market value
of securities on loan was $13,662,331, for which the Fund received collateral,
comprised of non-cash collateral valued at $1,849,600, and cash collateral of
$12,363,940. Investments purchased with cash collateral are presented on the
schedule of investments under the caption Securities Lending
Collateral.
7. Credit and Market Risk
The Fund invests a portion of its assets
in high yield fixed income securities, which carry ratings of BB or lower by
Standard & Poors Ratings Group and/or Ba or lower by Moodys Investors
Service, Inc. Investments in these higher yielding securities are generally
accompanied by a greater degree of credit risk than higher rated securities.
Additionally, lower rated securities may be more susceptible to adverse economic
and competitive industry conditions than investment grade securities.
The Fund invests in REITs and is
subject to some of the risks associated with that industry. If the Fund holds
real estate directly as a result of defaults or receives rental income directly
from real estate holdings, its tax status as a regulated investment company may
be jeopardized. There were no direct real estate holdings during the period
ended February 29, 2008. The Fund's REIT holdings are also affected by interest
rate changes, particularly if the REITs it holds use floating rate debt to
finance their ongoing operations.
The Fund may invest up to 10% of its
net assets in illiquid securities, which may include securities with contractual
restrictions on resale, securities exempt from registration under Rule 144A of
the Securities Act of 1933, as amended, and other securities which may not be
readily marketable. The relative illiquidity of these securities may impair the
Fund from disposing of them in a timely manner and at a fair price when it is
necessary or desirable to do so. While maintaining oversight, the Fund's Board
of Directors has delegated to Delaware Management Company, a series of Delaware
Management Business Trust, the day-to-day functions of determining whether
individual securities are liquid for purposes of the Fund's limitation on
investments in illiquid assets.
Securities eligible for resale pursuant to Rule 144A, which
are determined to be liquid, are not subject to the Funds 10% limit on
investments in illiquid securities. Both Rule 144A and illiquid securities have
been identified on the schedule of investments.
Item 2. Controls and Procedures.
The
registrants principal executive officer and principal financial officer have
evaluated the registrants disclosure controls and procedures within 90 days of
the filing of this report and have concluded that they are effective in
providing reasonable assurance that the information required to be disclosed by
the registrant in its reports or statements filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission.
There were no significant changes in
the registrants internal control over financial reporting that occurred during
the registrants last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the registrants internal control over
financial reporting.
Item 3. Exhibits.
File as
exhibits as part of this Form a separate certification for each principal
executive officer and principal financial officer of the registrant as required
by Rule 30a-2(a) under the Act (17 CFR 270.30a -2(a)), exactly as set forth
below:
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