John Gavin, CFA, manages money for high net worth individuals. Gavin utilizes a combination of open-end and closed-end mutual funds to meet each individual's investment objectives. Gavin is evaluating a mutual fund that has assets of $233 million and liabilities of $2 million. In addition, the Fund has a sales charge of 4% and a redemption fee of 1%. The Fund has 16.8 million shares. Gavin makes the following two statements.
Statement 1: The net asset value (NAV) of the fund is $13.75.
Statement 2: The primary difference between a closed-end and open-end fund is their method of computing net asset value(NAV).
Indicate whether Statement 1 and Statement 2 are correct.
Click on the arrows to vote for the correct answer
A. B. C.A
Statement 1: The net asset value (NAV) of the fund is $13.75.
To determine if Statement 1 is correct, we need to calculate the net asset value (NAV) of the fund. The NAV represents the per-share value of a mutual fund and is calculated by dividing the total net assets of the fund by the number of shares outstanding.
In this case, the fund has assets of $233 million and liabilities of $2 million. Therefore, the net assets of the fund can be calculated as:
Net Assets = Assets - Liabilities Net Assets = $233 million - $2 million Net Assets = $231 million
The fund also has 16.8 million shares outstanding. Dividing the net assets by the number of shares gives us the NAV:
NAV = Net Assets / Number of Shares NAV = $231 million / 16.8 million shares NAV ≈ $13.75
Based on the calculations, Statement 1 is correct, and the net asset value (NAV) of the fund is approximately $13.75.
Statement 2: The primary difference between a closed-end and open-end fund is their method of computing net asset value (NAV).
To evaluate Statement 2, let's examine the primary differences between closed-end and open-end funds.
Closed-end funds issue a fixed number of shares through an initial public offering (IPO), after which the shares trade on an exchange like stocks. The price of the shares is determined by supply and demand in the market, and it may trade at a premium or discount to its net asset value (NAV). The NAV of a closed-end fund is typically calculated by dividing the total net assets of the fund by the number of shares outstanding, similar to open-end funds.
On the other hand, open-end funds continuously issue and redeem shares at their NAV. The NAV is calculated daily based on the current market value of the fund's assets minus any liabilities, divided by the number of shares outstanding.
Therefore, Statement 2 is incorrect. The primary difference between closed-end and open-end funds is not their method of computing the NAV, but rather the way they issue and redeem shares and how the share price relates to the NAV.
In conclusion, the correct answer is:
A. Only Statement 1 is correct.