Discounts and Premiums · Closed End Funds

A discount compares the share price with the net assets behind each share. The calculation is simple, but the denominator and the observation time must be consistent.

Use NAV as the denominator

The signed premium or discount is market price divided by NAV, minus one. A negative result is a discount. A positive result is a premium. Some websites display discounts as positive magnitudes instead, so inspect the label before comparing figures. A price of $18 against NAV of $20 is a 10% discount, because $2 divided by $20 equals 10%.

Do not reverse the calculation

The $2 gap is 11.11% of the $18 purchase price. That second number describes the price increase required to reach an unchanged $20 NAV. It is not the conventional discount percentage. The distinction matters when translating a valuation gap into a hypothetical investment return.

A smaller dollar price is not cheaper

Fund A trades at $8 with NAV of $10. Fund B trades at $40 with NAV of $50. Both have a 20% discount. The lower share price of A says nothing about which fund offers better value. Compare portfolio quality, expenses, leverage and the reliability of NAV before ranking either opportunity.

Keep the measurement reproducible

Record the price date, NAV date, currency and whether a distribution adjustment has occurred. A market quote and an old NAV can produce a misleading gap. For funds holding difficult assets, ask how those assets are valued. A discount to an uncertain estimate is different from a discount to a readily observable securities portfolio.

A useful research note separates the arithmetic from the thesis. Write the measured discount first. Then explain why it might persist or change. The percentage alone provides no timetable for convergence and no protection against a fall in underlying assets.

Try it yourself

A fund has NAV of $25 and trades at $22.50. Find the discount and the gain if the price reaches unchanged NAV.

Show the worked answer

The discount is 10%. A move from $22.50 to $25 would produce an 11.11% price gain before costs. The gain is hypothetical and assumes NAV does not change.

Further reading

Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. Fund terms, investor eligibility and tax treatment vary by product, account and jurisdiction.

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