A closed-end fund starts the year with a net asset value of $20. By year-end, NAV equals $20.90. At the beginning of the year, the fund is selling at a 4% premium to NAV. By the end of the year, the fund is selling at a 9% discount to NAV. The fund paid year-end distributions of income and capital gains of $2.30.

What is the rate of return to an investor in the fund during the year?

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Business

Pasha

24 October, 12:11

A closed-end fund starts the year with a net asset value of $20. By year-end, NAV equals $20.90. At the beginning of the year, the fund is selling at a 4% premium to NAV. By the end of the year, the fund is selling at a 9% discount to NAV. The fund paid year-end distributions of income and capital gains of $2.30.

What is the rate of return to an investor in the fund during the year?

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Miranda Ray · Answer 1

2.5%

Explanation:

Price at the beginning = NAV at the beginning * (1 + premium)

= 20 * 1.04 = 20.8

Price at the end = NAV at the end * (1 - premium)

= 20.90 * 0.91 = 19.019

NAV increase by $0.90 but price decrease by 1.781

Returns = (0.91 * 20.90 - 1.04 * 20 + 2.30) : 1.04 * 20

= 0.519 : 1.04 * 20

= 0.0249

= 2.49%

= 2.5%

OR

Returns = change in P + distribution / start of year P

= - 1.781 + 2.30 / 1.04 * 20

= 0.519/20.8

= 0.0249

=2.49%

= 2.5%