FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsEasy
A registered representative receives a market order from a client to sell 100 shares of XYZ Mutual Fund. At what price will this order be executed?
- AAt the Net Asset Value (NAV) calculated at the close of business on the day the order is received.
- BAt the Net Asset Value (NAV) calculated at the close of the business day following the order.
- CAt the public offering price (POP) calculated at the close of business on the day the order is received.
- DAt the public offering price (POP) calculated at the close of the business day following the order.
Show answer & explanationAnswer & explanation
Correct answer: A. At the Net Asset Value (NAV) calculated at the close of business on the day the order is received.
Mutual fund orders are priced based on the next Net Asset Value (NAV) calculated after the order is received. This is known as forward pricing. For a sell order, the client receives the NAV.
Why the other options are wrong
- B. This describes forward pricing but for the wrong day; orders are priced based on the NAV calculated on the day the order is received.
- C. This describes forward pricing for the correct day, but POP is for purchases, not sales, and mutual funds are priced at NAV for redemptions.
- D. This describes forward pricing for the wrong day and uses POP, which is incorrect for a sell order.
Forward Pricing
The method by which mutual fund shares are purchased or redeemed, where the price is based on the next calculated Net Asset Value (NAV) after the order is received.
- Applies to mutual funds.
- Orders received before the NAV calculation cutoff (usually 4 PM ET) are priced at that day's NAV.
- Orders received after the cutoff are priced at the next business day's NAV.
Memory trick: NAV's Next Value, Not Now!