FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsEasy
A client is considering investing in a mutual fund and asks about the process for purchasing shares. The registered representative explains that after the order is received, the purchase will be executed based on the Net Asset Value (NAV) calculated at the close of the business day. This pricing method is known as:
- ADeferred pricing
- BForward pricing
- CReal-time pricing
- DBackward pricing
Show answer & explanationAnswer & explanation
Correct answer: B. Forward pricing
Forward pricing is the method used by mutual funds where orders (purchases or redemptions) are executed at the next calculated Net Asset Value (NAV) after the order is received. This means the price is not known until after the market closes on the day the order is placed (if placed before the cutoff).
Why the other options are wrong
- A. Deferred pricing is not a recognized term for mutual fund pricing.
- C. Real-time pricing is used for exchange-traded securities, not open-end mutual funds.
- D. Backward pricing is prohibited by regulations because it would allow investors to profit from knowing the previous day's NAV.
Forward Pricing (Mutual Funds)
The mandatory pricing method for open-end mutual funds, where purchase and redemption orders are executed at the next calculated Net Asset Value (NAV) after the order is received.
- NAV is typically calculated once daily, at market close (4 PM ET).
- Orders placed before the 4 PM ET cutoff receive that day's NAV.
- Orders placed after the cutoff receive the next business day's NAV.
Memory trick: Forward's the Future, Not the Past's Figure.