FRM Part I · FRM Exam Part I · Fund Management
A closed-end fund holds securities worth $300 million with no liabilities and has 12 million shares outstanding. Its shares trade on an exchange at $22.50. Which statement is correct?
The fund trades at a 10% discount to NAV. NAV per share is $300 million divided by 12 million shares, or $25.00, and the market price of $22.50 is $2.50 below that, which is 10% of NAV. Closed-end shares are not redeemed at NAV, so discounts can persist.
- AThe fund trades at a 10% discount to NAVCorrect
- BThe fund trades at a 10% premium to NAV
- CThe fund trades at a 25% discount to NAV
- DThe fund trades at NAV because the market price is set by arbitrage with redemptions
Explanation
NAV = 300/12 = $25.00. Discount = (25.00 - 22.50)/25.00 = 10%. A premium is the wrong sign. 25% uses the wrong base (the $10 figure is not relevant). Closed-end funds do not redeem at NAV, so arbitrage does not force price to NAV.
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