Description
This article is from the A Guide to
Closed-End Funds (CEFs).
Closed-End Funds: A Deeper Look at Discount/Premium: Some Definitions
The discount or premium at which a CEF trades is perhaps the single
most important factor influencing the decision to invest in the CEF.
Let us review the definition of discount/premium, and develop a few
related concepts.
- Discount/Premium.
- The market price at which the shares of a CEF trade may be at a
premium to the NAV, that is, the shares of the CEF may cost
more than its NAV, or at a discount to its NAV, that is, the
shares of the CEF may cost less than its NAV. For example, if the NAV
of a CEF is $10 and its market price is $12, the CEF is trading at a
premium of 20%. If the NAV is $10 and its market price is $8, the CEF
is trading at a discount of 20%. The premium/discount may be computed
using the following formula:
Premium/Discount = (Market Price - NAV) / NAV
- The Moving Average of
Discount/Premium.
- The discount/premium gives a snapshot of the current valuation of
the CEF with respect to its NAV: if the CEF is trading at a wide
discount then it is attractively valued. However, what if the CEF has
always traded at a wide discount? To get a perspective on the recent
history of the CEF's discount/premium, a moving average is useful. For
example, a 15-week moving average is the average of the current
discount/premium and the discount/premium of the last 14 weeks. Often,
the moving average can be plotted to determine trends in the discount:
is the discount widening, narrowing, or stable?
- Relative Discount (with respect to
the moving average).
- A useful factor in the decision to invest in a CEF is whether the
CEF is trading at a much wider discount than the recent historical
norm. Relative discount, the difference between the current
discount/premium and the moving average of the discount/premium,
provides a measure of this factor.
Relative Discount = Discount - Moving Average of Discount
- Relative Discount (with
respect to the discounts of comparable CEFs).
- Another useful factor in the decision to invest in a CEF is
whether the CEF is trading at a much wider discount relative to
comparable CEFs than the historical norm.
Continue to:
Share and Enjoy
Bookmark this story so others can enjoy it:
Tags
CEFs, closed-end fund, premium, discount, volatility, trading, investing, leverage, yields, buying, selling, shares, money, funds, mutual funds, adventages, disadvantages, liquidity, commissions, brokers, source, information, reference
