Hold to Maturity Value

During the U.S. Bailout debate Bernanke introduced the buzzphrase "hold to maturity value". The argument is that mortgage backed securities currently trade for irrationally low prices in the markets given the likely cash received if the security was held to maturity. In other words, some loans will default but not as many as implied by current prices. One of the purposes of the "bailout" is to push up the prices of these securities closer to their intrinsic values in order to help keep financial institutions from becoming insolvent.

Many of the closed end funds I own trade at similarly irrationally low prices in the markets:



As you can see, some of the discounts to net asset value are more than 50%. I wondered what effect accounting for all these closed end funds would have on my net worth. As the table shows, using NAVs instead of current share prices would value these funds at $A147,000 instead of $A102,000 adding $A45,000 or about 10% to net worth.

I expect that eventually when the financial crisis diminishes these funds will trade nearer to their NAVs as they have in the past. In most cases I expect NAV to also rise though in the case of NCT it will probably fall. Its NAV is given by valuing both its assets and liabilities at current market prices for mortgage related securities and its liabilities are poorer quality than its assets.