At 2:30 PM EST on a regular trading day, a retail investor instructs a registered represen… — FINRA SIE (Securities Industry Essentials)

At 2:30 PM EST on a regular trading day, a retail investor instructs a registered representative to place two market buy orders: one for shares of a Class A open-end mutual fund that carries a $4\%$ front-end sales charge, and one for shares of a exchange-listed closed-end management investment company. At the time of order entry (2:30 PM EST), the closed-end fund's market quotation is $\$24.50$ Bid / $\$24.55$ Ask, and its estimated NAV is $\$26.00$ . At 4:00 PM EST market close, the mutual fund calculates its end-of-day NAV at $\$25.00$ , while the closed-end fund's end-of-day NAV is calculated at $\$26.10$ and its final consolidated tape trade occurs at $\$24.60$ . Assuming standard market operations and excluding commissions, which of the following best describes the execution prices the investor will pay for each purchase?

The open-end mutual fund shares execute at the Public Offering Price (POP) of $\$26.04$ calculated at 4:00 PM EST, while the closed-end fund shares execute immediately at the prevailing secondary market ask price of $\$24.55$ at 2:30 PM EST.Answer
B
Both the open-end mutual fund shares and the closed-end fund shares execute based on their respective 4:00 PM EST forward Net Asset Values (NAV) of $\$25.00$ and $\$26.10$ .
C
The open-end mutual fund shares execute at $\$26.04$ based on 4:00 PM EST forward pricing, while the closed-end fund shares execute at the 4:00 PM EST closing market trade price of $\$24.60$ .
D
The open-end mutual fund shares execute immediately at 2:30 PM EST based on the fund's prior day NAV, while the closed-end fund shares execute at the 4:00 PM EST calculated NAV of $\$26.10$ .

Answer

The open-end mutual fund shares execute at the Public Offering Price (POP) of

\$26.04

calculated at 4:00 PM EST, while the closed-end fund shares execute immediately at the prevailing secondary market ask price of

\$24.55

at 2:30 PM EST.

The correct choice accurately applies forward pricing to the open-end mutual fund and real-time secondary market pricing to the closed-end fund. Open-end mutual fund shares are purchased from the fund at the Public Offering Price (POP) calculated using the 4:00 PM EST NAV:

\text{POP} = \frac{\text{NAV}}{1 - \text{Sales Load}} = \frac{\$25.00}{0.96} = \$26.04

. Closed-end fund shares trade like stocks on an exchange throughout the day; a market buy order at 2:30 PM EST executes immediately at the current prevailing asking price of

\$24.55

Step-by-Step Solution

Determine the execution price mechanism for the open-end mutual fund.

Open-end mutual funds purchase and redeem shares continuously through primary market issuance based on forward pricing. Orders placed prior to 4:00 PM EST execute at the end-of-day NAV plus any applicable sales load.

Under FINRA and SEC rules, mutual fund orders received prior to market close receive the NAV next calculated at 4:00 PM EST.

Calculate the Public Offering Price (POP) for the Class A open-end mutual fund shares.

\text{POP} = \frac{\text{NAV}}{1 - \text{Sales Load}} = \frac{\$25.00}{1 - 0.04} = \frac{\$25.00}{0.96} = \$26.04

Class A mutual fund shares assess a front-end sales charge based on a percentage of the Public Offering Price.

Determine the execution price mechanism and timing for the exchange-listed closed-end fund.

Closed-end funds feature a fixed capitalization structure and trade on secondary equity exchanges throughout regular market hours based on real-time supply and demand.

Orders entered for closed-end funds are executed like common stock orders on an exchange.

Identify the precise market execution price for the 2:30 PM EST market buy order of the closed-end fund.

A market buy order placed at 2:30 PM EST fills immediately at the current lowest prevailing asking price on the exchange, which is

\$24.55

Buyers purchase at the ask price; closed-end funds do not trade at NAV on secondary exchanges.

Key Concept

Open-end mutual funds operate via forward pricing at end-of-day NAV, whereas closed-end management investment companies trade continuously on secondary market exchanges at prevailing bid/ask market prices.

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