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Difficulty: EasyInvestment Companies and Managed Funds

When evaluating investment company structures, an investor compares the operational and trading features of open-end management investment companies (mutual funds). Which of the following statements regarding open-end mutual funds are correct?

  1. A
    They issue a fixed number of shares during a single initial public offering.
  2. They continuously issue new shares and redeem existing shares upon investor request.Answer
  3. Share purchases and redemptions are priced using forward pricing based on the next calculated Net Asset Value (NAV).Answer
  4. D
    Shares trade throughout the day on secondary stock exchanges based on market supply and demand.

Answer

Open-end mutual funds continuously issue and redeem shares, and transactions are executed using forward pricing based on the next calculated Net Asset Value (NAV).
Open-end mutual funds continuously issue new shares and stand ready to redeem existing shares upon investor request, and all orders are executed based on forward pricing using the next calculated Net Asset Value (NAV).

Step-by-Step Solution

1
Identify the capitalization and issuance structure of open-end mutual funds.
Open-end funds continuously offer new shares to buyers and redeem existing shares directly from sellers.
Unlike closed-end funds which issue a fixed number of shares at an IPO, open-end funds adjust their capitalization dynamically as investor funds flow in or out.
2
Determine the pricing mechanism for mutual fund share transactions.
Purchases and redemptions occur at the next computed Net Asset Value (NAV) per share (forward pricing).
Orders submitted during the trading day receive the NAV calculated after the market closes (typically 4:00 PM Eastern Time).

Key Concept

Operational and pricing characteristics of open-end management investment companies
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Topics

Investment Companies and Managed Funds

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