Redemption

A customer holding a non-traded REIT reads that the sponsor operates a share repurchase program and concludes she can get out whenever she wants. What correction is needed?

1. A.The program allows redemption only after the partnership term endsWrong. A REIT is not a partnership and has no stated term of that kind.
2. B.Repurchases occur at the original offering price, so she may lose nothingWrong. Repurchase pricing is typically below the stated value, not fixed at her cost.
3. C.Repurchases are capped, may be priced below stated value and can be suspendedCorrect. The accommodation is conditional and often unavailable when demand for it peaks.
4. D.She may sell the shares to another investor in the over-the-counter marketWrong. Non-traded shares have no meaningful secondary market by definition.

Why: A repurchase program is a limited accommodation, not a redemption right. Sponsors typically cap how many shares may be repurchased in a period, may price them below the stated value, and reserve the ability to suspend the program entirely, which they often do precisely when many holders want out at once. The program is therefore a partial and conditional source of liquidity that cannot be relied on for a planned exit. An exchange-listed REIT gives her a market she can sell into on any business day, which is the difference she should be weighing.

A closed-end fund's shares trade on an exchange at 9 dollars while its net asset value per share is 10 dollars. An investor asks whether he can require the fund to pay him the 10 dollars. What is the answer, and why?

1. A.Yes, because an investment company must always redeem its shares at net asset value.Wrong. That obligation belongs to open-end funds, which is precisely what a closed-end fund is not.
2. B.Yes, but only once he has held the shares for a full twelve months.Wrong. No holding period converts a closed-end share into a redeemable one.
3. C.No, because net asset value is calculated only once a year for closed-end funds.Wrong. Net asset value is computed regularly, and the discount reflects market pricing rather than stale figures.
4. D.No, because closed-end shares are sold to other investors at market prices.Correct. With no redemption right, the only exit is a secondary market sale at whatever buyers will pay.

Why: An open-end fund stands ready to redeem shares at net asset value, which is why its price cannot drift away from that figure. A closed-end fund carries no redemption obligation, so its shares trade on an exchange at prices set by supply and demand, and those prices can sit above or below net asset value for long stretches. The investor's only exit is to sell to another investor at the market price. That structural difference is also what allows closed-end funds to hold illiquid assets an open-end fund could not comfortably own.

A convertible bond is callable at 102. The stock has risen until the bond's CONVERSION VALUE is 125. If the issuer calls the bonds, rational holders will:

1. A.Sue the issuer for calling earlyWrong. Exercising a contractual call breaches nothing.
2. B.Hold the bonds and refuse both optionsWrong-but-tempting. After the call date, unconverted bonds stop accruing and pay only 102 - refusal is self-defeating.
3. C.Convert into stock worth about 125 rather than accept the 102 call priceCorrect. Conversion dominates redemption by 23 points.
4. D.Accept the call at 102 for safetyWrong. Surrendering 23 points of value is irrational.

Why: Facing redemption at 102 versus shares worth 125, holders convert; issuers deliberately call when conversion value exceeds call price to force the exchange and clean up the balance sheet. Citation: convertible bond call dynamics. Takeaway: call price below conversion value = conversion by compulsion.