Closed End Bond funds provide a rare opportunity for investors to make some quick money. It is very different from the traditional bond mutual funds that are popular in today’s market situations. The main difference between the open ended funds and closed end funds is the way they are traded on the market. In the case of closed end funds, a certain number of shares are issued by the company and they are traded on the markets just like stocks. This is a stark contrast to open end funds, in which they are issued and redeemed at the net asset value (NAV).
After the launch of the fund, additional shares are not issued. In other words, the limited numbers of shares that are issued at the beginning form the value of this fund and once the operation of the fund begins, new capital will not be attracted. New capital Shares once issued cannot be redeemed for cash or securities until the liquidation of the fund. Any investor who wants to acquire these shares should eventfully go to the secondary market, or a share broker. Shares can be traded any time during the day, whereas in case of open end market, shares could be traded only at the end of the day at the closing price.
Share value is determined by taking into consideration, the total value of the investments of the fund, and the premium or discount placed on it by the market. When it is traded above the NAV, it is said to be selling at a premium, and when traded below NAV it is selling at discount. In other words, shares are often traded slightly above or below the NAV.
The close end funds have to follow certain rules and regulations laid down by the governing authority. In general, they will have to gold an annual shareholders’ meeting and file reports. These actions are mandated to ensure that investors are protected.
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