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Net Asset Value

Net asset value (NAV), which is the value of all fund assets (less liabilities) divided by the number of shares outstanding, is very important in an open-end mutual fund because it is the price upon which all share purchases and redemptions are calculated. For purchases of mutual funds with front-end sales loads, known as "load funds," a brokerage charge generally is added to NAV to determine the purchase price.

Conversely, closed-end fund shares are bought and sold at "market prices" determined by competitive bidding on exchanges and not at NAV. Let's assume that the market price is $18 per share and that NAV is $20. In this case, the closed-end fund sells at a discount of $2 per share. On a percentage basis, the fund sells at a discount of 10% ($2 divided by $20). If the market price is above NAV, say $21 in this case, then the closed-end fund sells at a premium of 5%.

For a variety of reasons discussed later in this guide, many closed-end funds trade at a discount to NAV. This means investors can often buy a dollar's worth of securities for perhaps 95 cents or less. Even when the brokerage commission is added to the purchase price, the investor may be purchasing an interest in underlying securities with a value in excess of the fund's market price, thanks to the discount.



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