Question

One year​ ago, Super Star​ Closed-End Fund had a NAV of ​$10.25and was selling at​ a(n) 19 %discount.​ Today, its NAV is $ 11.68 and it is priced at​ a(n) 3 %premium. During the​ year, Super Star paid dividends of ​$0.42and had a capital gains distribution of  $0.93On the basis of the above​ information, calculate each of the following.

a. Super​ Star's NAV-based holding period return for the year.

b. Super​ Star's market-based holding period return for the year.___% Did the market​ premium/discount hurt or add value to the​ investor's return? Explain.

c. Repeat the​ market-based holding period return​ calculation, except this time assume the fund started the year at​ a(n) 19 % premium and ended it at​ a(n) 3 % discount. ​(Assume the beginning and ending NAVs remain at ​$10.25 and $ 11.68 ​respectively.) Is there any change in this measure of​ return? Why?

Answer 1

Answer a:

According to the given data

Lets calculate NAV-Based HPR

==>((NAV_{1 -} NAV₀) + Dividends + Capital Gains) / NAV₀

==>(11.68 - 10.25 + 0.42 + 0.93) / 10.25

==>2.78/10.25 = 0.2712

==>27.12 %

Super Star's NAV-based HPR for the year==>27.12%

Answer b:

Sale Price of Fund==> (NAV₀ )*(1-0.19) ==> 10.25*0.81==> $8.3025

Current Sale Price==> (NAV₁)*(1.03) ==>11.68*1.03==>$12.0304

Lets calculate Market-based HPR

==> [(Current Sale Price - Sale Price) + Dividends + capital gains] / Sale Price

==> [(12.0304 - 8.3025) + 0.42 + 0.93] / 8.3025 ==>0.6116==>61.16%

The return increased from 27.12% to 61.16%. So, Demand and Supply rule choose the market value of the fund. If Demand of Fund is higher then Fund may be sold on Premium furthermore if Demand is lesser it may be sold on Discount. In the question, Fund was at discount one year ago and as of now, it is at a premium. Accordingly, investors receive an excess return on Fund.

Answer c:

Sale Price

==> NAV₀ * (1+0.19) = 10.25 * 1.19 = $12.1975

Current Sale Price

==> NAV₁ * (1-0.03) = 11.68 * 0.97 = $ 11.3296

Market based HPR

==> ((Current Sale Price - Sale Price) + Dividends + capital gains) / Sale Price

==>((11.3296 - 12.1975) + 0.42 + 0.93) / 12.1975==>0.0395==>3.95%

Investors may lose their return because the Fund is at a premium while purchase and next one year it's on discount.

Demand for Fund one year ago is higher, accordingly, it was on premium but presently it's demand is lesser consequently it's on discount.

When the price moves higher it declared the Fund at Premium & the price goes under it is described as Fund at discount.

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