Lesson 3.2: Pricing of Fund Shares Flashcards
One of your customers called you on Wednesday at 8:00 am ET and asked you to buy $10,000 of the Liberty Balanced Fund Class A shares. If the Wednesday morning financial pages show the fund’s NAV to be $45.83 and the POP to be $48.24 and the Thursday morning quote shows the NAV as $46.22 and the POP as 48.65, how many shares did the customer receive?
205.550
Mutual fund pricing is based on the forward pricing rule. That is, the price is based on the next calculated net asset value per share after the order is received. That calculation is always done after the 4:00 pm ET close of the market. Therefore, an order received anytime on Wednesday before 4:00 pm will be executed based on the NAV calculated at that time. That 4:00 pm price will be shown in the financial section of Thursday morning’s newspapers. Remember, when purchasing shares, the price is always the POP. That makes the math $10,000 ÷ $48.65 which rounds to 205.550.
Open- and closed-end investment companies have all of the following in common except
A) they compute their net asset values.
B) they actively manage their portfolios.
C) they have stated investment objectives.
D) they trade their shares in the secondary market.
D) they trade their shares in the secondary market.
Open-end companies (mutual funds) do not trade shares in the secondary market. However, both open-end and closed-end companies compute their net asset values, actively manage their portfolios, and have stated investment objectives.
Under the Investment Company Act of 1940, purchases by which of the following are eligible for the reduced sales charges applicable at the fund’s stated breakpoints?
I. A qualified retirement plan
II. The combined purchases of a man and a custodial account for his daughter where his wife, not he, is the custodian
III. Two friends who have pooled their money to make a large purchase
IV. An investment club
I & II
**Investment clubs and otherwise unaffiliated groups MAY NOT pool their money to receive a breakpoint. **Incorporated or otherwise affiliated entities, such as spouses or a parent and minor child, may do so. The fact that the custodian of the daughter’s account is the spouse does not change things.
Regarding a closed-end investment company:
A) it sells at the market price based on supply and demand.
B) it is a type of management company.
C) it differs from a mutual fund.
A closed-end investment company does not redeem its own shares. The term mutual fund refers to an open-end management investment company that issues redeemable shares. Please note that there is a type of closed-end fund called an interval fund. At stated intervals, the internal fund offers to redeem shares. Unless that exception was stated in the question, closed-end shares are never redeemable.
Which of the following statements about open-end investment companies (mutual funds) are true?
I. Open-end investment companies are also known as mutual funds.
II. Open-end investment companies continually offer shares for sale to the public.
III. The price at which an open-end investment company will sell shares to the public is based on the share’s net asset value (NAV).
ALL
An open-end investment company is also known as a mutual fund. One of the distinguishing characteristics of open-end companies is their continuous offering of new shares. The price at which open-end investment companies sell shares to the public is always based on the NAV per share. To that is added any sales charge or load indicated in the prospectus.
The Mortise Growth Fund, a registered open-end investment company, has a 1% redemption fee. To calculate the amount to be received on redemption of this fund’s shares, what would be used?
The NAV minus the redemption fee
The mutual fund will redeem shares at the NAV. In our question, the 1% redemption fee is subtracted from the proceeds sent to the investor.
It would be most accurate to refer to a 12b-1 charge as:
a fee to cover distribution expenses.
Some funds charge ongoing fees under Section 12b-1 of the Investment Company Act of 1940. These fees are deducted annually and are used to pay for the cost of marketing and distribution. It is not a deferred sales charge because those only refer to fees charged when the investor liquidates shares. No-load funds are permitted to have a 12b-1 charge as long as it does not exceed 0.25%.
All open-end investment companies sell at:
NAV plus a sales charge (if any). Therefore, the asking price can never be less than the NAV.
Closed-end company asking prices are determined by:
supply and demand, so their prices are independent of the fund’s NAV.
Which investment companies registered under the Investment Company Act of 1940 can include senior securities in its capital structure?
Closed-end management investment companies
Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds).
A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding, the net asset value per share is closest to:
$32.55
The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the net assets are the $100 million portfolio value minus the liabilities of $10 million for the unpaid securities plus the $5 million in accrued management fees. That leaves $85 million divided by the 2,611,437 shares outstanding, which is approximately $32.55.
Which of the following activities would have an effect on the NAV of a mutual fund?
I. The sale of securities from the portfolio
II. Automatic reinvestment of dividends by the shareholders
III. Market appreciation of portfolio securities
IV. Market decline in the value of portfolio securities
III & IV
The formula to determine NAV is assets minus liabilities divided by shares outstanding. The sale of securities from the portfolio will replace the asset (securities) with an equal value of the asset (cash) and will have no effect on the NAV. The reinvestment of dividends will also not affect the NAV, because the shares going out are offset equally by the cash coming in. Market appreciation or decline will, however, affect the NAV because asset value will either increase or decrease, but liabilities and shares outstanding will remain unchanged.
When comparing the pricing of open-end investment companies with that of closed-end investment companies, it is correct to state that:
only the open-end bases its price on the next computed NAV per share.
The pricing of open-end shares (mutual funds) is based on the next computed NAV per share (forward pricing), while closed-end shares (CESs) trade based on supply and demand. There is no correlation between share prices and fund structure. Only the open-end must perform a daily NAV computation; closed-end funds may compute daily, but many do it only weekly. It is correct to state that closed-end funds can issue preferred stock in addition to common stock and open-end funds can only issue one class of stock, but that has nothing to do with comparing the pricing of the two.
