If you want to liquidate (sell) your holdings in a closed-end fund, then you would Group of answer choices sell your shares on the open market at net asset value sell your shares back to the fund at net asset value sell your shares on the open market at a premium to net asset sell your shares on the open market at the current market price
The correct answer and explanation is:
Correct Answer: Sell your shares on the open market at the current market price.
Explanation (Approximately 300 words):
Closed-end funds (CEFs) are a type of investment fund that raises a fixed amount of capital through an initial public offering (IPO). After the IPO, the fund’s shares are listed and traded on a stock exchange, much like stocks.
Unlike mutual funds or exchange-traded funds (ETFs), closed-end funds do not redeem shares directly from investors. This means you cannot sell your shares back to the fund at the net asset value (NAV)—which is the per-share value of the fund’s underlying assets. Instead, you must sell your shares to another investor on the open market.
The price at which you can sell your closed-end fund shares is the current market price, which is determined by supply and demand. This market price can be above (a premium) or below (a discount) the NAV. For example, if investors are very optimistic about the fund, its market price may rise above the NAV. Conversely, if there’s low demand, the price may fall below the NAV.
Therefore, the correct answer is that you sell your shares on the open market at the current market price, which may or may not be equal to the NAV.
To summarize:
- NAV is the theoretical value based on the fund’s assets.
- Market price is what investors are willing to pay on the exchange.
- CEF shares trade like stocks—investors must find buyers in the market.
- The fund itself is not obligated to buy back shares.
Understanding this distinction is important for investors, as they may realize gains or losses depending on how the market price compares to the NAV at the time of sale.