Definition
Closed-end funds and some ETFs can trade at prices above (premium) or below (discount) their NAV. Premiums indicate strong demand; discounts indicate weak demand or market stress. For closed-end funds, persistent discounts of 5-15% are common. ETF arbitrage mechanisms keep most ETF premiums/discounts within 0.01-0.05% of NAV.
functions Formula
Premium/Discount = (Market Price − NAV) / NAV × 100%
lightbulb Example
A closed-end bond fund has NAV of $20.00 but trades at $17.50. Discount = ($17.50-$20.00)/$20.00 = -12.5%. An investor buying at this discount effectively gets $20 of assets for $17.50.
verified_user Key Points
- Closed-end funds frequently trade at discounts
- ETF arbitrage keeps prices near NAV
- Premium/discount narrowing can enhance or reduce returns
- Widening discounts during crises create opportunities