NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsMedium
A financial advisor is explaining the features of various pooled investment vehicles to a client. The client is interested in an investment that trades on an exchange, has a fixed number of shares, and whose price is determined by supply and demand, often trading at a premium or discount to its Net Asset Value (NAV). Which of the following best describes this investment vehicle?
- AOpen-end mutual fund
- BUnit Investment Trust (UIT)
- CClosed-end fund
- DExchange-Traded Fund (ETF)
Show answer & explanationAnswer & explanation
Correct answer: C. Closed-end fund
Closed-end funds are characterized by a fixed number of shares issued during an initial public offering (IPO), after which they trade on secondary markets. Their market price is determined by supply and demand, causing them to frequently trade at a premium or discount to their Net Asset Value (NAV).
Why the other options are wrong
- A. Open-end mutual funds issue and redeem shares continuously at their NAV.
- B. UITs are unmanaged, fixed portfolios that terminate on a specified date or when all securities are sold.
- D. ETFs trade on exchanges but typically track an index and try to maintain a price close to their NAV through creation/redemption mechanisms.
Closed-End Fund
A type of investment company that issues a fixed number of shares through an IPO, which then trade on secondary markets like stocks.
- Fixed number of shares
- Trades on exchanges (secondary market)
- Market price determined by supply/demand
- Can trade at a premium or discount to NAV
Memory trick: Many investors pool funds, getting diverse exposure like a financial 'buffet'.