A closed-end fund trading on the TSX has an NAV per unit of $15.50 and is currently trading at a market price of $14.25. Which of the following statements is TRUE regarding this situation?

Question: A closed-end fund trading on the TSX has an NAV per unit of $15.50 and is currently trading at a market price of $14.25. Which of the following statements is TRUE regarding this situation?

Answer options:

• The fund is trading at a premium to its NAV, indicating strong investor demand.
• This scenario provides an arbitrage opportunity for the fund manager to issue more units at a higher price. ✅ The fund is trading at a discount to its NAV, which could be due to factors like illiquid underlying holdings or poor investor sentiment.
• Investors who wish to redeem their shares will receive $15.50 per share directly from the fund.

Correct answer: The fund is trading at a discount to its NAV, which could be due to factors like illiquid underlying holdings or poor investor sentiment.

Explanation: When the market price ($14.25) is below the NAV per unit ($15.50), the fund is trading at a discount. This can be influenced by various market factors, but unlike open-end funds, investors cannot redeem at NAV.