A mutual fund has the following assets in its portfolio: $40 million in fixed-income securities and $40 million in stocks at current market values. In the event of a liquidity crisis, the fund can sell the assets at 96 percent of market value if they are disposed of in two days. The fund will receive 98 percent if the assets are disposed of in four days. Two shareholders, A and B, own 5 percent and 7 percent of equity (shares), respectively.

a. Market uncertainty has caused shareholders to sell their shares back to the fund. What will the two shareholders receive if the mutual fund must sell all the assets in two days? In four days?

b. How does this situation differ from a bank run? How have bank regulators mitigated the problem of bank runs?

 LO.1