FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsEasy
A client places an order to purchase shares of a mutual fund at 2:30 PM ET on a Monday. The fund's Net Asset Value (NAV) is calculated daily at 4:00 PM ET. What price will the client pay for the shares?
- AThe NAV calculated at 4:00 PM ET on the preceding Friday.
- BThe NAV calculated at the time the order was placed.
- CThe NAV calculated at 4:00 PM ET on Tuesday.
- DThe NAV calculated at 4:00 PM ET on Monday.
Show answer & explanationAnswer & explanation
Correct answer: D. The NAV calculated at 4:00 PM ET on Monday.
Mutual fund orders are priced using the next calculated NAV after the order is received. Since the order was placed before the 4:00 PM ET calculation on Monday, that day's NAV will apply.
Why the other options are wrong
- A. This is incorrect as the order is executed based on future, not past, NAVs.
- B. This is incorrect; mutual funds do not price shares continuously throughout the day but at a specific daily cut-off time.
- C. This would be incorrect as the order was placed before Monday's NAV was calculated; Tuesday's NAV would apply only if the order was placed after Monday's NAV calculation.
Forward Pricing (Mutual Funds)
Mutual fund shares are purchased or redeemed at the next calculated Net Asset Value (NAV) after the order is received.
- Orders placed before the daily NAV calculation receive that day's NAV.
- Orders placed after the daily NAV calculation receive the next business day's NAV.
- Ensures fairness and prevents market timing.
Memory trick: Forward means 'next' for fund pricing.