FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsMedium
A client calls their registered representative on Tuesday morning and places an order to purchase shares of a mutual fund. The fund's prospectus states that its Net Asset Value (NAV) is calculated at the close of the New York Stock Exchange (NYSE) each business day. When will the client's order be executed?
- AAt the NAV calculated at the close of the NYSE on Tuesday.
- BAt the NAV calculated at the open of the NYSE on Wednesday.
- CAt the NAV calculated at the close of the NYSE on Monday.
- DAt the NAV calculated at the time the order was placed.
Show answer & explanationAnswer & explanation
Correct answer: A. At the NAV calculated at the close of the NYSE on Tuesday.
Mutual funds use forward pricing. Orders are executed at the next calculated NAV after the order is received. Since the order was placed Tuesday morning, before Tuesday's market close, it will receive Tuesday's closing NAV.
Why the other options are wrong
- B. This would only apply if the order was placed after Tuesday's market close.
- C. This is incorrect; forward pricing means the next calculated NAV, not a past NAV.
- D. This is incorrect; mutual funds do not price continuously throughout the day but at a specific daily cut-off time (NYSE close).
Mutual Fund Forward Pricing
Mutual fund shares are purchased or redeemed at the next calculated Net Asset Value (NAV) after an order is received, typically at the close of the trading day.
- Ensures all investors get the same price for orders placed at the same time relative to the NAV calculation.
- Prevents market timing.
- NAV is usually calculated once per business day, often at NYSE close.
Memory trick: Mutual Funds always use the 'NEXT' NAV after you order.