Problem 2 from chapter 17 on Financial Markets and Institutions - 6th edition. T
ID: 2779859 • Letter: P
Question
Problem 2 from chapter 17 on Financial Markets and Institutions - 6th edition.
The exact question is as follows:
Open-end Fund A has 165 shares of ATT valued at $35 each and 50 shares of Toro valued at $45 each. Closed-end Fund B has 75 shares of ATT and 100 shares of Toro. Both funds have 1,000 shares outstanding. (LG 17-5)
a) What is the NAV of each fund using these prices?
b) If the price of ATT stock increases to $36.25 and the price of Toro stock declines to $43.375, how does that impact the NAV of both funds?
c) Assume that another 155 shares of ATT valued at $35 are added to Fund A. The funds needed to buy the new shares are obtained by selling 676 more shares in Fund A. What is the effect on Fund A's NAV if the prices remain unchanged from the original prices?
Explanation / Answer
a. What is the NAV of each fund using these prices?
Open-end Fund A has 165 shares of ATT valued at $35 each and 50 shares of Toro valued at $45 each
Value of Open-end Fund A = 165 * $35 + 50 * $45 = $8,025
NAV of open-end Fund A = Value of Open-end Fund A /No. of shares outstanding
= $8,025 /1000 = $8.025
Closed-end Fund B has 75 shares of ATT and 100 shares of Toro
Value of Closed-end Fund B = 75 * $35 + 100 * $45 = $7,125
NAV of Closed-end Fund B = Value of Closed-end Fund B /No. of shares outstanding
= $7,125 /1000 = $7.125
b. If the price of ATT stock increases to $36.25 and the price of Toro stock declines to $43.375, how does that impact the NAV of both funds?
New Value of Open-end Fund A = 165 * $36.25 + 50 * $43.375 = $8,150
New NAV of open-end Fund A = Value of Open-end Fund A /No. of shares outstanding
= $8,150 /1000 = $8.15
% change in NAV = ($8.15 - $8.025)/ $8.025 = 1.56%
New Value of Closed-end Fund B = 75 * $36.25 + 100 * $43.375 = $7,056.25
New NAV of Closed-end Fund B = Value of Closed-end Fund B /No. of shares outstanding
= $7,056.25/1000 = $7.05625
% change in NAV = $7.05625 - $7.125)/ $7.125= -0.97%
c. Assume that another 155 shares of ATT valued at $35 are added to Fund A. The funds needed to buy the new shares are obtained by selling 676 more shares in Fund A. What is the effect on Fund A's NAV if the prices remain unchanged from the original prices?
New Value of Open-end Fund A = (165+155)* $35 + 50 * $45 = $13,450
New NAV of open-end Fund A = $13,450/ (1,000 + 676) = $8.025
% change in NAV = ($8.025 - $8.025)/ $8.025 = 0%
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