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SIE practice questioneasyMutual Funds — Open-End vs Closed-End

How does an open-end mutual fund differ from a closed-end fund?

  1. AOpen-end funds issue a fixed number of shares; closed-end funds issue unlimited shares
  2. BThere is no practical difference between open-end and closed-end funds
  3. COpen-end funds trade on exchanges at market price; closed-end funds are purchased directly from the fund company
  4. DOpen-end funds continuously issue and redeem shares at NAV; closed-end funds issue a fixed number of shares that trade on exchanges✓ Correct answer
Explanation

Why D — Open-end funds continuously issue and redeem shares at NAV; closed-end funds issue a fixed number of shares that trade on exchanges

Open-end funds continuously issue new shares to buyers and redeem shares from sellers at the net asset value (NAV) calculated at end of day. Closed-end funds issue a fixed number of shares through an IPO, which then trade on exchanges at market prices that may be above (premium) or below (discount) NAV. This is a key distinction tested on the SIE.

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