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

Which of the following describes the pricing nature of closed-end mutual funds?

1. Prices are always equal to NAV

2. Prices can fluctuate above or below NAV

3. They are not subject to market fluctuations

4. They have a fixed price that does not change

The correct answer is: Prices can fluctuate above or below NAV

Closed-end mutual funds operate in a unique pricing structure compared to open-end funds. The correct answer reflects that the prices of closed-end mutual funds can fluctuate above or below their net asset value (NAV). This pricing behavior occurs because closed-end funds issue a fixed number of shares when they are launched, and those shares are then traded on an exchange like stocks. The market demand and supply for these shares ultimately determine their market price, which can deviate from the NAV. For instance, if investors believe the fund will perform well, the demand for its shares may drive the price higher than the NAV. Conversely, if the market sentiment is negative, the shares may trade at a discount to the NAV. This inherent relationship defines the pricing nature of closed-end mutual funds, making statement B accurate. In contrast, other options do not capture the characteristics of closed-end funds effectively. For example, stating that prices are always equal to NAV does not hold true due to market dynamics. Likewise, suggesting that closed-end funds are not subject to market fluctuations overlooks the fundamental aspect of their trading on exchanges, where market forces play a significant role in determining prices. Lastly, implying that they have a fixed price that does not change contradicts the nature of trading in the open