Discount and Premium
The market price at which point the shares of a closed-end fund are traded may be at a discount or premium to the net asset value that is abbreviated as NAV of the fund. As mentioned before, net asset value is the value of the underlying stocks and bonds in the fund. Thus if the market price of the CEF is above the NAV of the fund, after that the CEF is trading at a premium. In the opposite case, that is while the market price is lower than the NAV, the CEF is trading at a discount. The rate of the premium/discount can be calculated by using the following formula:
Premium/Discount=(MP-NAV)/NAV
In which, MP is Market Price
The discounts and premiums are what make investing in CEF''s rewarding. The rewards depend upon whether the fund is trading at a discount or a premium to the NAV. Such type of profitability comes in many forms and some of them are in the form of Magnified Yields and Shrinking Discounts.
Magnified Yields: while CEF''s trade at a discount, purchasing them would offer higher yields because dividends are computed on the NAV while the fund is being purchased at the discounted market value.