Pricing

With fees and costs covered, the next step is understanding how pooled investments are actually priced. Pricing mechanics differ significantly between open-end funds, closed-end funds, and ETFs, and the exam tests these differences directly.

Net Asset Value (NAV)

NAV is the per-share value of a fund's holdings, calculated as:

NAV=Total Fund Assets−Total Fund LiabilitiesTotal Shares Outstanding\text{NAV} = \frac{\text{Total Fund Assets} - \text{Total Fund Liabilities}}{\text{Total Shares Outstanding}}
  • Calculated once per business day, typically after the market closes (4:00 PM ET)
  • Represents the actual value of the underlying portfolio on a per-share basis
  • Used as the redemption price for open-end mutual funds

Public Offering Price (POP)

For load funds, investors pay more than NAV. They pay the public offering price (POP):

POP = NAV + Sales Load

  • Only applies to funds with a front-end sales load (typically Class A shares)
  • No-load funds are bought and sold at NAV (POP = NAV)
  • The sales load is the difference between POP and NAV

Example: A fund has a NAV of $20.00 and a 5% front-end load.

  • POP = $20.00 / (1 - 0.05) = $21.05
  • Sales load per share = $21.05 - $20.00 = $1.05

Exam Tip: Gotchas

  • The sales load percentage is calculated on the POP, not the NAV. A 5% load means 5% of the POP goes to the sales charge. That's why the formula divides NAV by (1 - load percentage) rather than simply adding 5% to NAV.

Pricing by Vehicle Type

VehiclePricing BasisPremium/Discount to NAV?
Open-end mutual fundsNAV (+ load if applicable)No; always transacts at NAV
Closed-end fundsMarket price on exchangeYes; commonly trades at a premium or discount
ETFsMarket price on exchangePossible, but typically stays close to NAV due to arbitrage

Exam Tip: Gotchas

  • Open-end funds always transact at NAV (no premiums or discounts). Only closed-end funds and ETFs trade at market prices.

Premiums and Discounts

Closed-end funds have a fixed number of shares that trade on exchanges. Because supply and demand drive the price, closed-end funds frequently trade at prices that differ from their NAV:

  • Premium: Market price > NAV (investors pay more than the underlying holdings are worth)
  • Discount: Market price < NAV (investors pay less than the underlying holdings are worth)
  • Closed-end funds more commonly trade at a discount to NAV

ETFs can also trade at premiums or discounts, but the authorized participant (AP) arbitrage mechanism keeps prices close to NAV:

  • If the ETF trades above NAV, APs create new shares (buy underlying securities, deliver them to the ETF, receive ETF shares, sell on market). This pushes the price down toward NAV.
  • If the ETF trades below NAV, APs redeem shares (buy ETF shares, deliver to the ETF, receive underlying securities, sell them). This pushes the price up toward NAV.

Exam Tip: Gotchas

  • ETF premiums and discounts are typically small due to the AP arbitrage mechanism. Closed-end fund discounts can be persistent and significant.

Forward Pricing

Open-end mutual funds use forward pricing:

  • Orders placed before the market close receive that day's NAV
  • Orders placed after the market close receive the next business day's NAV
  • This prevents investors from exploiting stale prices

Exam Tip: Gotchas

  • Forward pricing applies to open-end mutual funds, not ETFs. ETFs trade intraday at market prices on an exchange.