Pricing

The exam tests both the formulas and the structural reason ETFs stay near NAV while closed-end funds do not: the presence or absence of a redemption path back to the fund.

How Is Net Asset Value (NAV) Calculated?

Net Asset Value is the per-share value of a fund's assets minus its liabilities.

NAV = (Total Fund Assets - Total Fund Liabilities) / Shares Outstanding

• Calculated once daily after market close (4:00 PM ET) for open-end funds
• Basis for all mutual fund purchases and redemptions

How Is the Public Offering Price (POP) Calculated?

The Public Offering Price is what an investor actually pays to purchase mutual fund shares.

POP = NAV + Front-End Sales Charge

• For no-load funds: POP = NAV

Sales Charge % = Sales Charge / POP (not NAV)

To calculate POP directly from NAV and the sales charge percentage, rearrange that formula:

POP = NAV / (1 - Sales Charge %)

Example:

• NAV: $10.00
• Sales Charge %: 5% of POP
• POP: $10.00 / (1 - 0.05) = $10.00 / 0.95 = $10.53
• Sales Charge $: $10.53 - $10.00 = $0.53
• Check against the Sales Charge % formula above: $0.53 / $10.53 = 5% of POP

Exam Tip: Gotchas

Sales charge is based on POP, not NAV. Calculating based on NAV produces the wrong percentage.

How Do Discounts and Premiums Work for Closed-End Funds?

Closed-end fund market price is set by supply and demand, independent of NAV. After the IPO, investors buy and sell shares on the exchange at this market price in both directions; unlike mutual funds, NAV is never the transaction price.

• Premium: market price > NAV (investors pay more than underlying asset value)
• Discount: market price < NAV (investors pay less than underlying asset value)

Premium/Discount % = (Market Price - NAV) / NAV

• Closed-end funds commonly trade at a discount to NAV
• No mechanism to force price alignment (unlike ETFs)

Example: If NAV = $40 and market price = $45:

• ($45 - $40) / $40 = 0.125 = 12.5% premium

If NAV = $40 and market price = $36:

• ($36 - $40) / $40 = -0.10 = 10% discount

How Does ETF Arbitrage Keep Price Near NAV?

• ETFs trade at market price throughout the day
• Authorized participants (APs) keep ETF price close to NAV through creation/redemption
• Creation: AP assembles a basket of underlying securities, delivers to ETF issuer, receives new ETF shares (creation units); used when ETF trades at a premium. Selling those new shares on the market adds supply, pushing the price back down toward NAV.
• Redemption: AP buys ETF shares on the market, delivers to issuer, receives underlying securities; used when ETF trades at a discount. Removing those shares from the market dries up supply, pushing the price back up toward NAV.
• This arbitrage mechanism minimizes premiums/discounts (unlike closed-end funds)

What Is Intraday Indicative Value (IIV)?

• Often disseminated every 15 seconds for exchange-listed ETFs during trading hours, when the exchange provides it
• Represents the estimated per-share value of the ETF's underlying holdings
• Helps investors assess whether the ETF is trading near fair value

Exam Tip: Gotchas

Closed-end funds have no creation/redemption mechanism and can trade at persistent premiums or discounts. ETFs have an arbitrage mechanism (via authorized participants) that keeps their market price close to NAV. The exam tests this structural difference.

What Should You Check on Exam Day?

• NAV = (assets - liabilities) / shares outstanding, calculated once daily after the 4:00 PM ET close for open-end funds.
• POP = NAV + sales charge, and the sales charge percentage is always figured on POP, not NAV; use POP = NAV / (1 - sales charge %) to solve for POP directly.
• Closed-end fund premium/discount = (market price - NAV) / NAV; closed-end funds commonly trade at a discount with no mechanism to force alignment.
• ETF authorized participants use creation (at a premium) and redemption (at a discount) to arbitrage market price back toward NAV.