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How is the net asset value (NAV) of a mutual fund determined? What is meant by...

How is the net asset value (NAV) of a mutual fund determined? What is meant by the term marked-to-market daily?please explain with calculation

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Expert Solution

(1): NAV (net asset value) of a mutual fund is determined using the following formula: NAV = (fund assets – (fund liabilities+expenses))/number of units outstanding. It should be noted that in the formula provided here the amount of assets = market value of mutual fund investments + receivables + accrued income.

For example suppose that a mutual fund has assets of $10 million and liabilities of $4.5 million. Expenses are to the tune of $2 million. The number of units outstanding is 1 million units. Thus NAV = (10-(4.5+2))/1 = $3.5 per unit

(2): Marked to market daily is the daily settling of gains and losses that occurs due to changes in the market value of a security. Thus it leads to recording the value of an asset according to its current market price. This concept is applicable to securities, assets and investments.

Calculations using a hypothetical example: Suppose a bank has the following securities – bonds, stocks and MBS. The worth of the bonds are $5 million, of stocks are $5 million and MBS are $5 million. Total portfolio value = $15 million. Next day the value of stocks decline to $4 million. The bank will have to settle this development and account for a $5 million - $4 million = $1 million loss due to marked to market settlement. Its portfolio value after the marked to market settlement will be = 5+4+5 = $14 million.

jeff jeffy answered 8 months ago
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