Financial Markets and Institutions (2-downloads)

Calculating a Mutual Fund’s Net Asset Value

If you invest in a mutual fund, you will receive periodic statements summarizing

the activity in your account. The statement will show funds that were added to your

investment balance, funds that were withdrawn, and any earnings that have accrued.

One term on the statement that is critical to understanding the investment’s per-

formance is the net asset value (NAV). The net asset value is the total value of

the mutual fund’s stocks, bonds, cash, and other assets minus any liabilities such as

accrued fees, divided by the number of shares outstanding. An example will make

this clear. Suppose that a mutual fund has the following assets and liabilities:

The net asset value is computed by dividing the net worth by the number of

shares outstanding. If 10 million shares are outstanding, the net asset value is $3.02

($30,200,000/10,000,000 = $3.02).

The net asset value rises and falls as the value of the underlying assets changes.

For example, suppose that the value of the stock portfolio held by the mutual fund

rises by 10% and the value of the bond portfolio falls by 2% over the course of a

year. If the cash and liabilities are unchanged, the new net asset value will be

Stock (at current market value)

$22,000,000

Bonds (at current market value)

$9,800,000

Cash

$ 500,000

Total value of assets

$32,300,000

Liabilities

– $ 300,000

Net worth

$32,000,000

NAV

⫽

$32,000,000

10,000,000

⫽ $3 .20

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Part 6 The Financial Institutions Industry

The yield on your investment in the mutual fund is then

When you buy and sell shares in the mutual fund, you do so at the current NAV.

Yield

⫽

$3 .20

⫺ $3 .02

$3 .02

⫽

$0.18

$3.02

⫽ 5.96%