Pricing

Understanding how pooled investments are priced is fundamental to evaluating costs and making suitable recommendations.

Net Asset Value (NAV)

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

Public Offering Price (POP)

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 percentage = Sales Charge / POP (not NAV)

Example:

  • NAV: $10.00
  • Sales Charge: 5% of POP
  • POP: $10.00 / 0.95 = $10.53
  • Actual Sales Charge: $10.53 - $10.00 = $0.53

Exam Tip: Gotchas

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

Discount and Premium (Closed-End Funds)

Closed-end fund market price is set by supply and demand, independent of NAV.

  • Premium: market price > NAV (investors pay more than underlying asset value)
  • Discount: market price < NAV (investors pay less than underlying asset value)
  • Formula: (Market Price / NAV) - 1 = premium (+) or discount (-)
  • 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

ETF Pricing and Arbitrage

  • 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
  • Redemption: AP buys ETF shares on the market, delivers to issuer, receives underlying securities; used when ETF trades at a discount
  • This arbitrage mechanism minimizes premiums/discounts (unlike closed-end funds)

Intraday Indicative Value (IIV)

  • Published every 15 seconds for ETFs during trading hours
  • 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.