An investor places market sell orders at 1:00 PM EST for shares of both an open-end mutual… — FINRA SIE (Securities Industry Essentials)

An investor places market sell orders at 1:00 PM EST for shares of both an open-end mutual fund and a closed-end management investment company. At the time the orders are placed, the closed-end fund has a published Net Asset Value (NAV) of $25.00 per share and is trading on the secondary exchange market at$ 23.50. The open-end mutual fund had a previous business day closing NAV of $25.00 per share, and its updated NAV calculated at the 4:00 PM EST market close on the trade date is$ 23.80 per share. Assuming standard execution procedures and excluding transaction fees, at which prices will the investor's sell orders be executed?

The closed-end fund order executes at the prevailing secondary market price of $23.50, while the open-end mutual fund order executes at the next calculated forward NAV of$ 23.80.Answer
B
The closed-end fund order executes at its Net Asset Value of $25.00, while the open-end mutual fund order executes at the next calculated forward NAV of$ 23.80.
C
The closed-end fund order executes at the prevailing secondary market price of $23.50, while the open-end mutual fund order executes at the previous day's closing NAV of$ 25.00.
D
Both the closed-end fund and open-end mutual fund orders execute at $25.00 because investment company redemptions are legally required to occur at the most recently published Net Asset Value.

Answer

The closed-end fund order executes at the prevailing secondary market price of

23.50, and the open-end mutual fund order executes at the next calculated forward NAV of

23.80.

Closed-end funds trade on secondary stock exchanges where pricing is determined continuously by supply and demand, causing execution at the current market price of

23.50. In contrast, open-end mutual funds redeem shares through a continuous primary offering mechanism regulated by SEC Rule 22c-1 forward pricing, meaning orders execute at the next calculated NAV after receipt (

23.80 at the 4:00 PM EST close).

Step-by-Step Solution

Analyze trading and pricing mechanics for closed-end management investment companies.

Closed-end fund shares are publicly traded on secondary exchanges. Investors buy and sell shares from other investors at current market prices determined by supply and demand, which can be at a discount or premium to the fund's NAV. Therefore, an order placed at 1:00 PM EST executes at the prevailing exchange market price of $23.50.

Closed-end funds do not continuously issue or redeem shares with the fund itself after the initial public offering.

Analyze pricing mechanics and redemption procedures for open-end management investment companies (mutual funds).

Open-end mutual funds are subject to SEC Rule 22c-1 (Forward Pricing). Orders placed to purchase or redeem mutual fund shares must be executed at the next calculated NAV following receipt of the order. Because the order was placed at 1:00 PM EST, it receives the forward NAV calculated at the market close (4:00 PM EST), which is $23.80.

Mutual fund transactions are continuous primary market issuances and redemptions directly with the fund sponsor, evaluated once daily at market close.

Synthesize execution prices for both fund types.

Closed-End Fund execution =

23.50; Open-End Mutual Fund execution =

23.80.

Matches the combination of secondary exchange execution for the closed-end fund and forward NAV pricing for the open-end fund.

Key Concept

Pricing mechanics of open-end funds (forward pricing at next NAV) versus closed-end funds (secondary exchange supply and demand pricing).

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