Question

A closed-end fund starts the year with a net asset value of $10. By year-end, its...

A closed-end fund starts the year with a net asset value of $10. By year-end, its net asset value equals $12. At the start of the year, the fund sells at a 5% discount to the NAV. At the end of year, the fund sells at a 2% premium. The fund paid year-end distributions of income and capital gains of $1 per share. Suppose an investor invests $10,000 at the start of the year. Please answer the following questions:

1. What is the rate of return to the investor during the year?

2. How much is the year-end balance of the investment, including year-end distributions?

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Answer #1

1)  THE RATE OF RETURN TO THE INVESTEOR OF A FUND CAN BE CALCULATED USING THE FORMULA

RATE OF RETURN OF FUND=

OPENING NAV AFTER DISCOUNT=$10-5%=$9.5

CLOSING NAV INCLUDING PREMIUM=$12+2%=$12.24

DISTRIBUTIONS=$1

=   

  RATE OF RETURN OF FUND =$39.368

2) TOTAL INVESTMENT=$10,000

NO OF UNITS BOUGHT=10,000/9.5=1052.63

IE,ROUND OF TO 1053 UNITS.

BALANCE OF FUND =(CLOSING NAV+DISTRIBUTION)*NO OF UNITS

=(12+1)*1053=$13,689

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