If you are going to invest in a closed-end mutual fund and were told that the net asset value of the fund is $11.20, and the share price was $11.80. What is the discount you would receive or the premium that you would pay?
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A. B. C. D.C
(SP-NAV)/NAV=
(11.80-11.20)/11.20=0.05357
To determine the discount or premium associated with a closed-end mutual fund, we need to compare the share price to the net asset value (NAV) per share.
The net asset value (NAV) represents the per-share value of the fund's total assets minus its liabilities. It is calculated by dividing the total value of the fund's assets by the number of outstanding shares.
In this case, the net asset value (NAV) of the fund is given as $11.20, and the share price is $11.80.
To calculate the discount or premium, we can use the following formula:
Discount/Premium = (Share Price - NAV) / NAV
Substituting the given values into the formula:
Discount/Premium = ($11.80 - $11.20) / $11.20 = $0.60 / $11.20 ≈ 0.0536
The resulting value is positive, indicating a premium. A premium means that the share price is higher than the net asset value (NAV). Therefore, we would pay a premium of approximately 0.0536 or 5.36%.
The correct answer is C. 0.0536.