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Question

Difficulty: EasyInvestment Companies and Managed Funds

An investor places an order to purchase shares of an open-end management investment company (mutual fund) at 2:00 PM EST on a Tuesday. At what price will the investor's purchase order be executed?

  1. At the next calculated Net Asset Value (NAV) per share determined at the end of the trading day, plus any applicable sales chargeAnswer
  2. B
    At the prevailing secondary market bid-ask price at the exact time the order is placed
  3. C
    At the previous business day's closing Net Asset Value (NAV) per share
  4. D
    At the average of the highest and lowest Net Asset Value (NAV) calculated over the past trading week

Answer

The purchase order will be executed at the next calculated Net Asset Value (NAV) per share determined at the end of the trading day, plus any applicable sales charge.
Open-end mutual funds operate under the forward pricing rule. When an investor submits an order to purchase or redeem mutual fund shares, the order is executed at the next calculated Net Asset Value (NAV) per share (plus any applicable sales loads), which is calculated after market close (typically 4:00 PM EST).

Step-by-Step Solution

1
Identify the type of investment company
The product is an open-end management investment company (mutual fund).
Open-end funds issue and redeem shares continuously directly with investors rather than trading on secondary exchanges.
2
Determine the pricing rule applicable to open-end fund orders
Orders are subject to the forward pricing rule.
Under SEC regulations, orders received prior to market close (typically 4:00 PM EST) receive the NAV calculated at the close of trading on that same day.

Key Concept

Forward Pricing Rule for Open-End Mutual Funds
Estimated Time:45s
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Topics

Investment Companies and Managed Funds

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