Chapter 8.2 Open End vs Closed End Investment Companies

Open End Investment Companies

1. Also called *Mutual Fund* 2. Issue only *redeemable shares* 3. May only issue *voting common shares*. 4. Net asset value (NAV) per share equals *total assets of the fund less the total liabilities divided by the total number of shares outstanding*. 5. *NAV* reflects *closing market value* of all securities *plus any interest or dividend*. 6. An increase in the NAV is *appreciation*. 7. No-Load Funds are mutual funds that don't charge a sales load. The Bid and Ask will always be the same.

Open End Key Facts

1. Capitalization constantly changes, thus *the 33 Act Prospectus Regulations apply*. (newly issued shares) 2. When an Open End Company has "Net Redemptions", it means that more investors are redeeming (selling their shares than purchasing (buying) new shares). 3. Maximum sales loads: - *Max under the 1940 Act is 9%* (Remember 9's for 9%) - *Max under FINRA Rules is 8.50%*

Closed End Investment Companies

1. Does not issue redeemable shares. *Shares trade* on an exchange or OTC based on supply and demand. 2. NAV does not directly relate to the Bid and the Ask. The Bid and Ask may be higher than the NAV. (Whenever the NAV per share of a fund is greater than the Ask, fund must be a closed-end fund.) *3.* No sales load is charged - *commissions* are charged *4.* Fixed Capitalization - There is an IPO. Then, the shares trade in the Secondary market.

Open/Closed-End Review

1. What is the Major Difference between Closed-End and Open-End funds? *Capitalization* - The capitalization on an Open End Fund is: ......................... *Constantly Changing* - The capitalization on a Closed End Fund is: .................................... *Fixed*

Business Development Company

Is a type of *closed end investment company* that provides *debt capital to small and medium sized companies* that cannot otherwise easily raise capital. The targeted BDC investors are *retail clients with high risk tolerance*. Like REITs, BDCs are required to distribute at least 90% of their income as dividends. BDCs provide relatively high dividend yields, but along with *high yields, come high risks*: a. *Credit* - BDCs are sub-prime lenders. The companies that they lend to are rated "junk". b. *Market* - BDC shares are very volatile. c. *Leverage* - BDCs make money by borrowing at low interest rates and lending at higher interest rates. Overleveraging can cause a problem for BDCs because of their relatively illiquid portfolio.

Closed End Issues

May issue: - *Common Stock* - *Preferred Stock* - *Bonds* - All of the above may be listed on an *Exchange*

Net Asset Value

Relates directly to the *bid* (sell at) and *ask* (buy at) price *Bid = NAV = Redemption Price* *Ask = NAV + Max Sales Load = Offering Price*(could be less than posted price) - Ask is calculated daily at the close of the NYSE - Asking Price is the price a customer might pay. a. It is calculated using the worst case scenario (the maximum sales load). b. It does not take into consideration *breakpoint discount* amounts and sales load reductions.

Forward Pricing

Required when buying or selling shares. - Investors get next calculated bid or ask price after the order is entered. - An increase in NAV is *appreciation*. -No-Load Funds are mutual funds that don't charge a sales load. The BID and ASK will always be thr same.

Closed-End Price Quote

When looking at a *price quote for a closed-end fund*, the last column is the "% difference". This indicates that today's closing price is x% higher or lower than the previous day's closing price. *Example* *Fund*.......... *NAV*.......... *Stock Price*...........*% Difference* ABC........... $29.18........... $29.74........................ +2.1%