For ETF investors, this means the ETF price falls to a discount to its NAV.
(The reverse is true for any premiums that may arise.) Bond mutual funds guarantee the ability to buy and sell exactly at NAV in times of market stress. Buying and selling exactly at NAV shields shareholders who want to exit during times of market stress from the true costs of liquidating that portfolio. Buy-and-hold bond mutual fund investors subsidize the costs of investors who leave.
In fact, unless you're a panic seller, during volatile times, bond mutual fund investors may be worse off. Mutual fund and ETF managers rely on bond pricing services, which estimate the value of individual bonds based on reported trades, trading desk surveys, matrix models and so on. But there's a natural mechanism in place to keep an ETF’s share price and NAV aligned: arbitrage.
APs use arbitrage to keep ETF share prices and NAV in line.
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Fed funds transactions can be initiated by either a funds lender or a funds borrower.
Bond ETFs Cheaper, Tradable Bond ETFs offer several advantages over mutual funds, including: Do Premiums & Discounts Mean Bond Mutual Funds Are Better Than Bond ETFs? Without an official exchange, there's no single agreed-upon price for the value of any particular bond.An institution seeking to lend fed funds identifies a borrower directly, through an existing banking relationship, or indirectly, through a fed funds broker.The most commonly used method to transfer funds between depository institutions is for the lending institution to authorize its district Federal Reserve Bank to debit its reserve account and to credit the reserve account of the borrowing institution.A special class of institutional investors known as "authorized participants" (APs) have the ability to create or destroy shares of an ETF at any time.Should an ETF's share price dip below its NAV, APs can make money on the difference by buying up shares of the ETF on the open market and trading them in to the issuer for an "in kind" exchange of the underlying bonds.