Premium to Net Asset Value

We're going to start this one out with a little bit of jargon-filled gobblety-gook.

The term "premium to net asset value" describes a circumstance when shares of a closed-end fund rise above the per-share amount of the fund's net asset value. In other words, the fund is getting a premium in the marketplace compared to the assets it actually holds.

First step in the breakdown: defining a closed-end fund. In a typical mutual fund, you purchase shares from the fund itself. It doesn't trade on an open market. A closed-end fund works differently. Shares of these funds get bought and sold on exchanges, much like stocks or other securities.

Meanwhile, net asset value refers to the total value of the fund's holdings (minus its liabilities). So...add up everything the fund holds, taking out whatever it owes, and then divide that total by the amount of shares outstanding. That calculation leaves you with the NAV per share.

Thoeretically, the price of the fund as represented on the exchange should be close to its net asset value per share. Usually, it trades at a discount. However, there are times when the fund's price rises beyond its NAV. That situation defines a premium to net asset value.