Certified Anti-Money Laundering Specialist Certification (CAMS) Practice Exam

How does a closed-end mutual fund operate?

1. It can accept unlimited investments from new shareholders

2. It issues a fixed number of shares that may sell at a premium or discount

3. Its share price is fixed until the fund is closed

4. Investors can redeem shares directly with the fund

The correct answer is: It issues a fixed number of shares that may sell at a premium or discount

A closed-end mutual fund operates by issuing a fixed number of shares at the time of its initial public offering (IPO). Once these shares are issued, they are traded on an exchange like stocks. Because of this fixed supply, the market price of the shares can fluctuate based on demand and supply dynamics, which can result in the shares trading at either a premium (above the net asset value) or a discount (below the net asset value) relative to the fund's underlying assets. This structure contrasts with open-end funds, which continuously issue and redeem shares based on investor demand, allowing for unlimited investments from new shareholders. The other options do not accurately reflect the operational mechanics of a closed-end mutual fund. For instance, a closed-end fund does not accept unlimited investments since the number of shares is capped after the IPO, and its share price is not fixed, as it can vary based on the market. Additionally, investors cannot redeem their shares directly with the fund at book value; rather, they must sell their shares to other investors in the secondary market.