A discount occurs when an investment is priced below its net asset value (NAV), while a premium occurs when it is priced above its NAV.
Which of the following best describes a discount in the context of pooled investments?
Not Correct
Correct!
Select an option above to see an explanation here.
A) This describes a premium, not a discount. B) A discount occurs when an investment's market price is lower than its net asset value (NAV). C) This describes the bid-ask spread, not a discount. D) This describes arbitrage, not a discount.
Which type of pooled investment can trade at a discount or premium to its net asset value (NAV)?
A) Open-end funds issue and redeem shares based on investor demand, so they trade at their NAV. B) Closed-end funds issue a fixed number of shares and trade on an exchange, allowing their market price to fluctuate and potentially trade at a discount or premium to their NAV. C) ETFs typically trade close to their NAV due to the creation and redemption process. D) Mutual funds are a type of open-end fund and typically trade at their NAV.
In the late 1990s, a closed-end fund experienced a significant discount to its net asset value due to market sentiment and investor concerns about the fund's holdings. This discount attracted value investors who saw an opportunity to buy the fund's assets at a lower price than their intrinsic value. Over time, the discount narrowed as the fund's performance improved and investor sentiment shifted, allowing these investors to profit from the change in pricing.
An investor notices that a closed-end fund is trading at a 5% premium to its net asset value (NAV). What does this mean?
A) A premium occurs when an investment's market price is higher than its net asset value (NAV), so the fund's market price is 5% higher than its NAV. B) This describes a discount, not a premium. C) This would indicate a discount, not a premium. D) This would also indicate a discount, not a premium.
An investor notices that a closed-end fund is trading at a 10% discount to its net asset value. They believe the fund's holdings are undervalued, and the discount will eventually narrow. The investor decides to purchase shares of the fund, hoping to profit from the potential increase in price as the discount narrows.
Become a Pro Member to see more questions
Example Series 65 Example Practice Question
- *Premium to NAV*: When the market price of a pooled investment, such as a closed-end fund or ETF, is higher than its net asset value (NAV) per share, it is said to be trading at a premium to NAV. - *Discount to NAV*: When the market price of a pooled investment is lower than its net asset value (NAV) per share, it is said to be trading at a discount to NAV.
- *Premium to NAV example*: If a closed-end fund has a NAV of $20 per share and is currently trading at $22 per share, it is trading at a premium to NAV. - *Discount to NAV example*: If an ETF has a NAV of $50 per share and is currently trading at $48 per share, it trades at a discount to NAV.