Question 3252 of 3960 from exam CFA® LEVEL 1: CFA® Level 1

D

The NAV and the market price of a closed-end fund are almost never the same, because closed-end funds typically have market prices that has historically been a

5 to 20 percent discount to NAV.

The correct answer is D. a closed-end fund.

A closed-end fund is a type of investment fund that issues a fixed number of shares through an initial public offering (IPO). These shares are then traded on a stock exchange, similar to stocks. Unlike open-end funds, which continuously issue and redeem shares at their net asset value (NAV), closed-end funds have a fixed number of shares outstanding.

The net asset value (NAV) of a closed-end fund is calculated by dividing the total value of the fund's assets by the number of outstanding shares. The NAV represents the per-share value of the fund's assets. On the other hand, the market price of a closed-end fund is determined by the supply and demand dynamics in the market, just like any other stock.

Since closed-end funds are traded on stock exchanges, their market prices are influenced by factors such as investor sentiment, market conditions, and supply and demand for the shares. As a result, the market price of a closed-end fund can deviate from its NAV. If the market price is higher than the NAV, the fund is said to be trading at a premium. Conversely, if the market price is lower than the NAV, the fund is said to be trading at a discount.

This deviation between the NAV and the market price is one of the key characteristics of closed-end funds. It occurs because the number of shares is fixed, and the market price is determined by market participants, whereas the NAV is calculated based on the underlying value of the fund's assets. This feature distinguishes closed-end funds from open-end funds, where shares are created or redeemed at the NAV, ensuring that the market price closely tracks the NAV.

In summary, the NAV and the market price of a closed-end fund are almost never the same due to the fixed number of shares and the influence of market dynamics on the fund's market price.