FRM Part I · FRM Exam Part I · Fund Management
A closed-end fund has a NAV of $20.00 per share and trades on an exchange at $17.00. Which statement is correct?
The fund trades at a 15% discount to NAV, since 17 versus 20 is a 3 dollar gap on a 20 dollar NAV. Closed-end fund shares are bought and sold between investors on an exchange, not redeemed by the fund at NAV.
- AThe fund trades at a premium of 15%, because price is below NAV
- BThe fund trades at a discount of 15%, and investors buy shares from other investors in the marketCorrect
- CThe fund trades at a discount of 17.6%, and the fund must redeem shares at NAV
- DThe fund trades at a discount of 15%, and the fund will redeem shares at NAV on request
Explanation
Discount = (17 - 20)/20 = -15%. Closed-end shares trade in the secondary market, so investors transact with other investors, and the fund does not redeem at NAV. Options citing redemption at NAV describe open-end funds.
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