Lifting the Hood on Bond-Fund NAVs
Determining the net asset value of holdings that trade infrequently requires use of a special system.
Question: I understand how net asset value is calculated for equity funds because I can look and see how various holdings are performing in the market. But how is it calculated for bond funds given that bond prices are often less transparent?
Answer: You've hit on an important difference in understanding how equity and bond funds operate. As you mention, calculating net asset value, or NAV, for an equity fund is a fairly straightforward process. You simply total up the end-of trading-day value of all the fund's assets, subtract out expenses such as the manager's salary and administrative fees, and divide the result by the number of fund shares outstanding. Because stocks owned by mutual funds typically are traded on exchanges and are fairly liquid--meaning shares are traded frequently and therefore pricing is updated often--it's easy to know how much each position in the equity fund's portfolio is worth.