Question

A closed-end fund starts the year with a net asset value of $11.00. By year-end, NAV equals $11.20. At the beginning of the year, the fund was selling at a 3% premium to NAV. By the end of the year, the fund is selling at a 6.5% discount from NAV. The fund paid year- end distributions of income and capital gains of $2.10. a. What is the rate of return to an investor in the fund during the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Rate of return % b. What would have been the rate of return to an investor who held the same securities as the fund manager during the year? (Do no round intermediate calculations. Round your answer to 2 decimal places.) Rate of return

Answer 1

a.

Let NAV₀ and NAV₁ denote the fund’s net asset value at the beginning of the year and at the end of the year, orderly.

The return on the fund is shown below

=

(1 - 0.065) NAV1 -(1 + 0.03)NAVO + 2.10 (1 + 0.03)NAVO

=

0.935 *11.20 -1.03 * 11 + 2.10 1.03米 11

= 10.96%

b.

The investor if holds the securities would avoid premium at beginning and discount at the end. This would deliver him higher return as there was premium at purchase time and discount at time of sale

The return from holding the securities

directly would have been

(NAV₁ – NAV₀ + 1.5)    / NAV0

= (11.20 − 11 + 2.1) / 11

= 20.90 %