SIE practice questionhardClosed-End Funds — Premium and Discount
A closed-end fund has a NAV of $25 per share but is trading at $22 on the exchange. The fund is trading at:
- AA 12% premium
- BA 12% discount✓ Correct answer
- CPar value
- DA 13.6% premium
Explanation
Why B — A 12% discount
Discount = (NAV - market price) / NAV = ($25 - $22) / $25 = $3 / $25 = 12% discount. Closed-end funds frequently trade at premiums or discounts to NAV because supply and demand determine their market price. This contrasts with open-end funds, which always transact at NAV. Persistent discounts are common and may represent opportunity or reflect investor concerns about the fund.
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