Management of Financial Institutions 2079 Board Question Paper

Two Principal Roles of Financial Assets

Financial assets perform two primary economic functions:

1. Facilitating Fund Transfers (Capital Allocation):
   • Financial assets channel surplus funds from economic units with excess savings (households/savers) to deficit units (corporations/governments) who can deploy capital into productive physical investments, driving economic growth.
2. Allocation and Redistribution of Risk:
   • Financial assets transfer risk from individuals and businesses averse to bearing uncertainty to institutional investors and market participants who are willing to absorb risk in exchange for an expected return.

Depository Institutions and Classification in Nepal

Depository Institutions are financial intermediaries whose primary source of funds consists of deposits mobilized from the general public (which constitute their primary liabilities), which they deploy primarily in loans, advances, and marketable securities (their primary assets).

Depository Institutions in Nepal (Under BAFIA 2073 / NRB Classification):

1. Class ‘A’ Commercial Banks: Full-service banks providing retail, corporate, trade finance, and foreign exchange services (e.g., Nabil Bank, Global IME Bank, Nepal Bank Ltd.).
2. Class ‘B’ Development Banks: Institutions focused on regional and infrastructure credit mobilization (e.g., Muktinath Bikas Bank, Garima Bikas Bank).
3. Class ‘C’ Finance Companies: Specialize in hire purchase, leasing, housing finance, and consumer credit (e.g., Manjushree Finance, Goodwill Finance).
4. Saving and Credit Cooperatives: Community-based institutions licensed to accept deposits and provide micro-credit to their registered members.

Major Risks Faced by Financial Institutions

The major risks confronting financial institutions include:

1. Credit (Default) Risk: The risk that borrowers or counterparties fail to meet their contractual debt service obligations.
2. Liquidity Risk: The risk of being unable to meet immediate cash payment obligations (e.g., sudden deposit withdrawals, loan disbursements) without incurring catastrophic losses.
3. Interest Rate Risk: The risk that fluctuations in market interest rates adversely affect net interest income (NIM) and the market value of equity.
4. Operational Risk: Losses arising from internal process failures, human error, fraud, software bugs, or external disasters.
5. Market / Price Risk: Exposure to losses in on- and off-balance sheet positions arising from movements in market prices (equities, bonds, commodities).
6. Foreign Exchange Risk: The risk that adverse movements in foreign currency exchange rates diminish the value of foreign currency assets or expand liabilities.

Syndicated Bank Loan

A syndicated bank loan is a large-scale commercial loan provided collectively by a syndicate (consortium) of multiple lending institutions to a single corporate or sovereign borrower under unified loan documentation.

Key Features:

• Lead Arranger / Agent Bank: A principal bank originates, negotiates the terms, structures the credit facility, and handles administrative distribution of payments among participants.
• Risk Sharing: Allows individual banks to participate in colossal financing requirements (e.g., Upper Tamakoshi Hydropower, cement factories, telecom infrastructure in Nepal) without violating single-obligor exposure limits.
• Standardized Covenants: All lenders share proportionate security liens and interest cash flows.

Differences Between Market Order and Limit Order

Role of Brokers in Capital Markets

Key roles played by stockbrokers in the capital market include:

1. Order Execution: Acts as an agent on secondary stock exchanges (such as NEPSE) executing buy and sell orders on behalf of retail and institutional clients via the Trading Management System (TMS).
2. Clearing and Settlement Facilitation: Interfaces with CDS and Clearing Limited (CDSC) and clearing banks to ensure timely transfer of securities into Demat accounts and settlement of purchase consideration.
3. Market Information and Research: Provides clients with technical charts, fundamental valuation reports, corporate disclosures, and economic research to aid decision-making.
4. Investor Enrollment: Assists new investors in completing KYC documentation, opening trading accounts, and navigating online trading platforms.

Definition of Capital Adequacy Ratio (CAR)

The Capital Adequacy Ratio (CAR)—also known as the Capital-to-Risk Weighted Assets Ratio (CRAR)—is a key prudential regulatory metric that measures a bank’s available capital cushion relative to its total risk-weighted assets.

$$CAR = \frac{\text{Tier 1 (Core) Capital} + \text{Tier 2 (Supplementary) Capital}}{\text{Total Risk-Weighted Assets (Credit + Market + Operational)}} \times 100\%$$

Objective: It ensures that banks maintain sufficient equity and subordinated capital to absorb a reasonable amount of losses before becoming insolvent, thereby protecting depositors’ funds and preserving systemic stability.

Components of Narrow Money ($M_1$)

Under the monetary framework of Nepal Rastra Bank (NRB), Narrow Money ($M_1$) consists of:

1. Currency in Circulation Outside Banks: Currency notes and coins held by the non-bank public (excluding vault cash held by depository financial institutions).
2. Demand Deposits (Current / Checking Accounts): Highly liquid checking deposits held by individuals, business corporations, and non-financial entities in commercial banks and other depository institutions that can be withdrawn or transferred immediately via checks, debit cards, or digital transfers without prior notice.
3. Other Liquid Deposits at the Central Bank: Non-reserve transactional deposits of financial institutions held directly with Nepal Rastra Bank.

Treasury Bill Price Calculation from Bank Discount Yield

Given:

• Face Value ($F$) = Rs. 1,000,000
• Days to Maturity ($t$) = 90 days
• Bank Discount Yield ($Y_{bd}$) = 8% = 0.08
• Standard discount basis year = 360 days

Step 1: Calculate Dollar Discount ($D$)

$$Y_{bd} = \frac{D}{F} \times \frac{360}{t} \implies D = F \times Y_{bd} \times \frac{t}{360}$$

$$D = 1,000,000 \times 0.08 \times \frac{90}{360} = 1,000,000 \times 0.08 \times 0.25 = \text{Rs. } 20,000$$

Step 2: Calculate Treasury Bill Purchase Price ($P$)

$$P = F - D = 1,000,000 - 20,000 = \mathbf{\text{Rs. } 980,000}$$

Answer: The price of the 90-day Treasury bill is Rs. 980,000.

Taxable Equivalent Yield (TEY) Calculation

Given:

• Marginal Tax Rate ($T$) = 35% = 0.35
• Tax-Exempt Yield ($Y_{te}$) = 2.6% = 0.026

Formula:

$$\text{Taxable Equivalent Yield (TEY)} = \frac{Y_{te}}{1 - T}$$

$$\text{TEY} = \frac{2.6\%}{1 - 0.35} = \frac{2.6\%}{0.65} = \mathbf{4.00\%}$$

Answer: The equivalent taxable yield for an investor in the 35% tax bracket is 4.00%.

Pension Funds: Definition and Types

1. Definition of Pension Funds

A pension fund is a non-depository institutional financial intermediary that mobilizes periodic contributions from employers and employees during their working years, invests these accumulated funds in diversified portfolios of financial assets (debt, equity, government bonds, real estate), and distributes regular retirement benefits or lump-sum settlements upon retirement or disability.

---

2. Types of Pension Funds

A. By Benefit Structure:

1. Defined Benefit (DB) Plan:
   • The retirement payout is guaranteed according to a predetermined contractual formula based on factors such as final average salary, years of service, and an accrual rate:
     $$\text{Retirement Benefit} = \text{Accrual Rate} \times \text{Years of Service} \times \text{Final Salary}$$
   • The employer/sponsor bears all investment and longevity risk. If asset returns fall short of actuarial liabilities, the plan is underfunded and the sponsor must make up the deficit.
2. Defined Contribution (DC) Plan:
   • The contribution rate is fixed (e.g., 10% from employee + 10% from employer), but the ultimate retirement benefit depends entirely on the investment performance of the accumulated portfolio.
   • The employee/beneficiary bears all investment risk.

B. By Sponsorship and Management:

1. Public Pension Funds:
   • Established by national legislation for civil servants, military personnel, and public-sector workers.
   • Nepalese Examples: Karmachari Sanchayakosh (Employees Provident Fund - EPF) and Nagarik Lagani Kosh (Citizen Investment Trust - CIT).
2. Private Pension Funds:
   • Established by private corporations, trade associations, or commercial insurers for private-sector employees (e.g., gratuity funds, approved retirement funds).

C. By Funding Method:

1. Funded Pension Plans: Contributions are accumulated in legally separated trust assets dedicated to meeting future pension obligations.
2. Unfunded (Pay-As-You-Go / PAYGO) Plans: Current retirement benefits are paid directly out of current government tax revenues or employer operating cash flows without an accumulated investment fund.

D. By Underwriting:

1. Insured Pension Plans: Administered and underwritten by a life insurance company that guarantees an annuity payout.
2. Trusteed Pension Plans: Managed by an independent board of trustees who appoint external investment asset managers.

Capital Adequacy and Risk-Weighted Assets Analysis

Given Data:

• Assets with risk weight 0.00 = Rs. 10 million
• Assets with risk weight 0.20 = Rs. 350 million
• Assets with risk weight 0.50 = Rs. 680 million
• Assets with risk weight 1.00 = Rs. 1,010 million
• Tier 1 Capital = Rs. 60 million
• Tier 2 Capital = Rs. 70 million

---

a. Total Risk-Weighted Assets (RWA)

$$\begin{aligned} \text{RWA}_1 &= 10 \times 0.00 = \text{Rs. } 0 \text{ million} \\ \text{RWA}_2 &= 350 \times 0.20 = \text{Rs. } 70 \text{ million} \\ \text{RWA}_3 &= 680 \times 0.50 = \text{Rs. } 340 \text{ million} \\ \text{RWA}_4 &= 1,010 \times 1.00 = \text{Rs. } 1,010 \text{ million} \\[6pt] \mathbf{\text{Total RWA}} &= 0 + 70 + 340 + 1,010 = \mathbf{\text{Rs. } 1,420 \text{ million}} \end{aligned}$$

---

b. Tier-One (Core) Capital Ratio

$$\text{Tier-1 Capital Ratio} = \frac{\text{Tier 1 Capital}}{\text{Total RWA}} \times 100 = \frac{60}{1,420} \times 100 = \mathbf{4.23\%}$$

---

c. Tier-Two (Supplementary) Capital Ratio

Under Basel / NRB prudential directives, eligible Tier 2 capital cannot exceed 100% of Tier 1 capital (i.e., $\text{Eligible Tier 2} \le \text{Rs. } 60 \text{ million}$).

• Reported Tier 2 Ratio: $\frac{70}{1,420} \times 100 = \mathbf{4.93\%}$
• Eligible Regulatory Tier 2 Ratio: $\frac{60}{1,420} \times 100 = \mathbf{4.23\%}$

---

d. Total Capital Ratio (CAR)

• Based on reported capital ($60 + 70 = 130$ million):
  $$\text{Reported CAR} = \frac{130}{1,420} \times 100 = \mathbf{9.15\%}$$
• Based on regulatory eligible capital ($60 + 60 = 120$ million):
  $$\text{Eligible CAR} = \frac{120}{1,420} \times 100 = \mathbf{8.45\%}$$

---

e. Capital Adequacy Evaluation

NRB Prudential Regulatory Benchmarks:

• Minimum Tier 1 Capital Ratio = 6.0% (and 8.5% including Capital Conservation Buffer).
• Minimum Total Capital Adequacy Ratio = 11.0% (8.5% minimum + 2.5% CCB).

Assessment:

1. The bank’s Tier 1 Capital Ratio is 4.23%, which fails the statutory minimum of 6.0%.
2. The Total Capital Ratio is 9.15% (or 8.45% with Tier 2 cap), failing the required minimum of 11.0%.
3. Furthermore, Tier 2 capital (Rs. 70M) exceeds Tier 1 capital (Rs. 60M), which violates the regulatory ceiling.

Conclusion: No, the bank does not have enough total capital. It is significantly undercapitalized under central bank guidelines and requires immediate Prompt Corrective Action (PCA), such as issuing rights equity shares, retaining all earnings, or shedding risk-weighted assets.

Reserve Requirements Analysis for Bank A and Bank B

Given Data:

• NRB Required Reserve Ratio ($r_d$) = 12% = 0.12
• Bank A: Total Deposits = Rs. 200 million, Total Reserves Held = Rs. 26 million
• Bank B: Total Deposits = Rs. 100 million, Total Reserves Held = Rs. 5 million

---

a. Required Reserves for Bank A and Bank B

$$\text{Required Reserves (RR)} = \text{Total Deposits} \times r_d$$

• Bank A:
  $$\text{RR}_A = 200 \times 0.12 = \mathbf{\text{Rs. } 24 \text{ million}}$$
• Bank B:
  $$\text{RR}_B = 100 \times 0.12 = \mathbf{\text{Rs. } 12 \text{ million}}$$

---

b. Excess or Short Reserves for Bank A and Bank B

$$\text{Net Position} = \text{Total Reserves Held} - \text{Required Reserves}$$

• Bank A:

  $$\text{Reserve Position}_A = 26 - 24 = \mathbf{+\text{Rs. } 2 \text{ million (Excess Reserve)}}$$
  (Bank A has Rs. 2 million in surplus funds available for lending or interbank placement).

• Bank B:

  $$\text{Reserve Position}_B = 5 - 12 = \mathbf{-\text{Rs. } 7 \text{ million (Deficit / Short Reserve)}}$$
  (Bank B suffers a reserve shortfall of Rs. 7 million and is subject to NRB penal interest unless it borrows in the interbank market or discount window).

---

c. Why Central Banks Set Reserve Ratios

Central banks impose statutory cash reserve ratios (CRR) for several core reasons:

1. Monetary Control and Money Multiplier Regulation: By altering $r_d$, the central bank directly influences the credit expansion capacity of depository institutions and regulates broad money supply growth.
2. Liquidity Buffer: Guarantees that commercial banks maintain liquid cash with the central bank to settle daily interbank clearing balances and meet sudden depositor runs.
3. Financial Discipline: Curtails reckless asset expansion and enforces sound risk management across the banking system.

Mortgage Loan Monthly Payment and Total Interest Calculation

Given Data:

• Purchase Price of Dream Home = Rs. 120,000
• Down Payment = Rs. 20,000
• Borrowed Loan Balance ($PV$) = $120,000 - 20,000 = \text{Rs. } 100,000$
• Loan Term = 30 years $\implies n = 30 \times 12 = 360$ monthly payments
• Annual Mortgage Rate = 12%
• Monthly Interest Rate ($i$) = $\frac{0.12}{12} = 0.01$ (1% per month)

---

1. Monthly Payment Calculation ($PMT$)

$$PMT = \frac{PV \times i}{1 - (1 + i)^{-n}}$$

$$\begin{aligned} (1 + i)^{-n} &= (1.01)^{-360} \approx 0.02781664 \\[4pt] 1 - (1 + i)^{-n} &= 1 - 0.02781664 = 0.97218336 \\[4pt] PMT &= \frac{100,000 \times 0.01}{0.97218336} = \frac{1,000}{0.97218336} = \mathbf{\text{Rs. } 1,028.61} \end{aligned}$$

---

2. Total Interest Paid at the End of 30 Years

$$\begin{aligned} \text{Total Lifetime Payments} &= n \times PMT = 360 \times 1,028.61 = \text{Rs. } 370,299.60 \\[4pt] \text{Principal Borrowed} &= \text{Rs. } 100,000.00 \\[4pt] \mathbf{\text{Total Interest Paid}} &= 370,299.60 - 100,000.00 = \mathbf{\text{Rs. } 270,299.60} \end{aligned}$$

Answer:

• Monthly mortgage payment = Rs. 1,028.61
• Total interest paid over 30 years = Rs. 270,299.60

Role of Brokers and Dealers & Major Problems in Nepalese Stock Market

1. Distinction Between Brokers and Dealers

---

2. Major Problems Confronting the Nepalese Stock Market (NEPSE)

1. Structural Sectoral Skewness:
   • The market is heavily dominated by commercial banks, insurance companies, and hydropower companies; manufacturing, consumer goods, and IT companies are largely absent.
2. Technological Bottlenecks and TMS Glitches:
   • The NEPSE Trading Management System (TMS) experiences frequent technical downtimes, connectivity lags, and delayed SMS/email confirmations during high-volume sessions.
3. Insider Trading and Information Asymmetry:
   • Price-sensitive announcements (e.g., right shares, bonus shares, quarterly dividends, mergers) frequently leak prior to formal NEPSE disclosures, disadvantaging general retail investors.
4. Limited Financial Instruments:
   • The secondary market lacks modern risk-hedging instruments such as derivatives (options, futures), exchange-traded funds (ETFs), municipal bonds, and a functional secondary corporate debenture market.
5. Speculative Herd Mentality:
   • Retail trading is predominantly driven by social media rumors, ‘pumping’ groups, and speculative trading rather than disciplined fundamental and financial analysis.
6. Underdeveloped Institutional Investor Base:
   • Dominated by individual retail traders; mutual funds, insurance companies, and pension funds account for a modest portion of total daily trading volumes.

Insurance: Concept and Nature of Business

1. Concept of Insurance

Insurance is an equitable financial mechanism for risk transfer and pooling, whereby an individual or business entity transfers the financial burden of potential catastrophic losses to an insurer in exchange for a known, small consideration termed premium. The legal foundation of insurance rests on fundamental principles:

• Utmost Good Faith (Uberrima Fides): Full disclosure of all material facts.
• Insurable Interest: Financial stake in the preservation of the subject matter.
• Indemnity: Restoration to the same financial position held immediately prior to the loss (not applicable to life insurance).
• Subrogation and Contribution: Preventing insureds from profiting from a loss across multiple policies.
• Proximate Cause: Direct causal nexus between insured peril and damage.

---

2. Nature of Business of Different Types of Insurance

                          Insurance Sectors
          ┌───────────────────────┴───────────────────────┐
    Life Insurance                              Non-Life Insurance
  (Long-Term Capital)                         (Short-Term Protection)

A. Life Insurance Business

1. Nature of Risk: Deals with mortality risk (premature demise) and longevity risk (outliving retirement assets).
2. Contract Duration: Long-term contracts spanning 10, 20, 30 years or whole life.
3. Cash Flow Dynamics: Collects upfront periodic premiums and establishes massive long-term actuarial reserves, acting as dominant institutional buyers of long-term government bonds, development bonds, and bank debentures.
4. Key Products:
   • Term Insurance: Pure death benefit without savings component.
   • Endowment Policies: Death benefit plus maturity sum assured upon policy term expiry.
   • Annuity Contracts: Periodic income payouts during retirement years.

B. Non-Life (Property and Casualty) Insurance Business

1. Nature of Risk: Covers accidental damage, destruction of tangible assets, and third-party liabilities arising from lawsuits.
2. Contract Duration: Typically short-term, renewable annual policies (1 year).
3. Cash Flow Dynamics: Claims are volatile, lumpy, and weather-dependent (catastrophic flood, fire, earthquakes), requiring high liquidity in money market instruments and commercial paper.
4. Key Sectors:
   • Motor Insurance: Compulsory third-party insurance plus own-damage vehicle protection.
   • Property / Fire Insurance: Covers physical assets, industrial complexes, and inventories against fire, lightning, earthquake, and flood risks.
   • Marine and Transit Insurance: Covers cargo shipments from international ports to warehouses in Nepal.
   • Engineering Insurance: Covers mega-construction projects (hydropower dams, tunnels, bridges).

C. Reinsurance Business

• Insurance for insurers; primary insurers cede excess risks beyond their net retention capacity to global and domestic reinsurers (e.g., Nepal Reinsurance Company Ltd., Himalayan Reinsurance Ltd.), preventing insolvency from catastrophic events.

Comprehensive Mortgage Loan Analysis

Given Data:

• Purchase Price of House = Rs. 2,000,000
• Down Payment Percentage = 20%
• Mortgage Term = 20 years $\implies n = 20 \times 12 = 240$ months
• Annual Interest Rate = 6%
• Monthly Interest Rate ($i$) = $\frac{0.06}{12} = 0.005$ (0.5% per month)

---

a. Amount of Down Payment

$$\text{Down Payment} = 0.20 \times 2,000,000 = \mathbf{\text{Rs. } 400,000}$$

---

b. Face Value of the Mortgage Loan ($PV$)

$$PV = \text{Purchase Price} - \text{Down Payment} = 2,000,000 - 400,000 = \mathbf{\text{Rs. } 1,600,000}$$

---

c. Monthly Payment on Mortgage ($PMT$)

$$PMT = \frac{PV \times i}{1 - (1 + i)^{-n}}$$

$$\begin{aligned} (1 + i)^{-n} &= (1.005)^{-240} = 0.302096 \\[4pt] 1 - (1 + i)^{-n} &= 1 - 0.302096 = 0.697904 \\[4pt] PMT &= \frac{1,600,000 \times 0.005}{0.697904} = \frac{8,000}{0.697904} = \mathbf{\text{Rs. } 11,462.90} \end{aligned}$$

---

d. Amount of Principal and Interest of $37^{\text{th}}$ Payment

To find the interest in month 37, first calculate the remaining mortgage balance at the end of month 36 ($B_{36}$). At $t = 36$, there are $240 - 36 = 204$ payments remaining:

$$B_{36} = PMT \times \left[ \frac{1 - (1 + i)^{-204}}{i} \right]$$

$$\begin{aligned} (1.005)^{-204} &= 0.361956 \\[4pt] \text{PVIFA}_{0.005, 204} &= \frac{1 - 0.361956}{0.005} = 127.6088 \\[4pt] B_{36} &= 11,462.90 \times 127.6088 = \text{Rs. } 1,462,767.11 \end{aligned}$$

• Interest in $37^{\text{th}}$ Payment ($I_{37}$):

  $$I_{37} = B_{36} \times i = 1,462,767.11 \times 0.005 = \mathbf{\text{Rs. } 7,313.84}$$

• Principal in $37^{\text{th}}$ Payment ($PR_{37}$):

  $$PR_{37} = PMT - I_{37} = 11,462.90 - 7,313.84 = \mathbf{\text{Rs. } 4,149.06}$$

---

e. Remaining Mortgage Balance at the End of $50^{\text{th}}$ Month ($B_{50}$)

At $t = 50$, there are $240 - 50 = 190$ payments remaining:

$$B_{50} = PMT \times \left[ \frac{1 - (1 + i)^{-190}}{i} \right]$$

$$\begin{aligned} (1.005)^{-190} &= 0.387920 \\[4pt] \text{PVIFA}_{0.005, 190} &= \frac{1 - 0.387920}{0.005} = 122.4160 \\[4pt] B_{50} &= 11,462.90 \times 122.4160 = \mathbf{\text{Rs. } 1,403,242.41} \end{aligned}$$

---

f. Total Interest Paid Over the Life of the Mortgage

$$\begin{aligned} \text{Total Payments} &= n \times PMT = 240 \times 11,462.90 = \text{Rs. } 2,751,096.00 \\[4pt] \text{Total Principal Repaid} &= \text{Rs. } 1,600,000.00 \\[4pt] \mathbf{\text{Total Interest Paid}} &= 2,751,096.00 - 1,600,000.00 = \mathbf{\text{Rs. } 1,151,096.00} \end{aligned}$$

Mutual Fund Portfolio Cash Inflows, NAV, and Valuation Dynamics

Given Data (Beginning of Day):

• Initial Portfolio Value = Rs. 1,000,000
• Initial Liabilities = Rs. 0
• Shares Outstanding = 10,000 shares

---

a. Beginning NAV Per Share

$$\text{NAV}_0 = \frac{\text{Portfolio Value} - \text{Liabilities}}{\text{Shares Outstanding}} = \frac{1,000,000 - 0}{10,000} = \mathbf{\text{Rs. } 100.00 \text{ per share}}$$

---

b. Change in the Number of Shares at the End of the Day

Since asset prices remain constant, all new investments and redemptions occur at the beginning NAV of Rs. 100:

• New Shares Issued (from Rs. 5,000 deposit):
  $$\Delta N_{\text{issued}} = \frac{\text{Deposit Amount}}{\text{NAV}_0} = \frac{5,000}{100} = +50 \text{ shares}$$
• Shares Redeemed (from Rs. 1,000 withdrawal):
  $$\Delta N_{\text{redeemed}} = \frac{\text{Withdrawal Amount}}{\text{NAV}_0} = \frac{1,000}{100} = -10 \text{ shares}$$
• Net Change in Shares Outstanding:
  $$\Delta N_{\text{net}} = 50 - 10 = \mathbf{+40 \text{ shares}}$$

---

c. Total Number of Shares Outstanding at the End of the Day

$$N_{\text{end}} = 10,000 + 40 = \mathbf{10,040 \text{ shares}}$$

---

d. Total Value of the Portfolio at the End of the Day

$$\begin{aligned} \text{Ending Portfolio Value} &= \text{Initial Value} + \text{Cash Inflows} - \text{Cash Outflows} \\[4pt] &= 1,000,000 + 5,000 - 1,000 = \mathbf{\text{Rs. } 1,004,000} \end{aligned}$$

---

e. New NAV Per Share at the End of the Day

$$\text{NAV}_{\text{end}} = \frac{\text{Ending Portfolio Value} - \text{Liabilities}}{N_{\text{end}}} = \frac{1,004,000 - 0}{10,040} = \mathbf{\text{Rs. } 100.00 \text{ per share}}$$

(Key Takeaway: Capital inflows and outflows executed at current NAV alter the scale and share count of an open-end fund, but have zero dilutive impact on NAV per share).

---

f. Impact if Portfolio Value Doubles to Rs. 2,000,000 During the Day

If the market price of portfolio securities doubles before transaction processing:

• Revised Portfolio Value = Rs. 2,000,000
• Initial shares = 10,000 shares
• Revised Beginning NAV:
  $$\text{NAV}'_0 = \frac{2,000,000}{10,000} = \mathbf{\text{Rs. } 200.00 \text{ per share}}$$

(Under this scenario, the NAV per share doubles from Rs. 100 to Rs. 200. Subsequent deposits of Rs. 5,000 would issue $5,000 / 200 = 25$ shares, and Rs. 1,000 withdrawals would redeem $1,000 / 200 = 5$ shares).