Foundations of Financial Institutions and Markets

Given:

• Purchase price of home = Rs 120,000
• Down payment = Rs 20,000
• Loan principal, (P = 120,000 - 20,000 =) Rs 100,000
• Annual interest rate = 12%
• Monthly interest rate, (i = \frac{12%}{12} = 1% = 0.01)
• Number of years = 30
• Number of monthly payments, (n = 30 \times 12 = 360)

Monthly payment formula:

[ M = P \times \frac{i(1+i)^n}{(1+i)^n - 1} ]

Substituting the values:

[ M = 100,000 \times \frac{0.01(1.01)^{360}}{(1.01)^{360} - 1} ]

[ (1.01)^{360} = 35.94964133 ]

[ M = 100,000 \times \frac{0.01 \times 35.94964133}{35.94964133 - 1} ]

[ M = 100,000 \times \frac{0.3594964133}{34.94964133} ]

[ M = 100,000 \times 0.01028612597 ]

[ M = \text{Rs } 1,028.61 ]

So, the monthly mortgage payment is Rs 1,028.61.

Total amount paid over 30 years:

[ \text{Total payment} = M \times n ]

[ = 1,028.61 \times 360 ]

[ = \text{Rs } 370,300.53 ]

Total interest paid:

[ \text{Total interest} = \text{Total payment} - \text{Loan principal} ]

[ = 370,300.53 - 100,000 ]

[ = \text{Rs } 270,300.53 ]

Answer:

• Monthly payment = Rs 1,028.61
• Total interest paid at the end of 30 years = Rs 270,300.53

Role of Brokers and Dealers in the Stock Market

Brokers and dealers are the two key market intermediaries who make the securities market function. Though both deal in securities, their roles differ.

Role of Brokers

A broker is an agent who buys and sells securities on behalf of clients for a commission (brokerage). In Nepal, they are licensed by SEBON and are members of NEPSE.

1. Acting as agent: A broker executes buy/sell orders in the name of the investor, not in his own name. The investor remains the real owner of the securities.
2. Order execution: Brokers place orders through the trading system (TMS) and match them in the automated order book.
3. Account opening and KYC: They open the investor's trading account (TMS/DMAT) and verify identity as per KYC rules.
4. Advisory service: They advise clients on when to buy or sell, based on market information and research.
5. Settlement support: They help in clearing and settlement of trades through the clearing house.
6. Market access: They give small investors access to the stock exchange, which they could not reach individually.
7. Income to the exchange: Brokerage commission is their main income; this also supports the exchange's operations.

Role of Dealers

A dealer trades in his own name and at his own risk, earning profit from the difference between buying (bid) and selling (ask) prices — the spread.

1. Principal trading: The dealer buys securities for his own account and sells from his own stock, so he is a principal, not an agent.
2. Market making: By quoting two-way prices (bid and ask), dealers provide liquidity and continuous trading.
3. Price stability: They reduce sudden price fluctuations by buying when prices fall and selling when prices rise.
4. Risk bearing: Dealers bear inventory and price risk, which brokers do not.
5. Reducing search cost: Investors need not search for a counterparty; the dealer is always ready to trade.

Difference in Brief

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Major Problems of the Nepalese Stock Market

1. Thin and narrow market: Only a few companies are listed and actively traded. A handful of scrips dominate turnover, so the market lacks breadth and depth.
2. Low liquidity: Many listed shares are not traded for days. Investors cannot easily convert holdings into cash.
3. Price manipulation and insider trading: Due to weak surveillance, a few big players manipulate prices. Cases of insider trading and "pump and dump" are common.
4. Weak regulatory enforcement: SEBON lacks adequate manpower, technology and legal teeth. Penalties are small, so violations continue.
5. Poor disclosure and transparency: Many companies publish incomplete or delayed financial reports. Investors take decisions on rumours rather than facts.
6. Dominance of small, irrational investors: Most investors are small, uneducated and guided by tips and herd behaviour, causing high volatility.
7. Lack of institutional investors: Mutual funds, pension funds and insurance companies invest little in shares, so the market lacks stability and long-term funds.
8. Limited financial literacy: A large part of the public does not understand shares, DMAT accounts or risk, so participation is low.
9. Weak primary market: New issue (IPO) allotment is often unfair; many genuine investors do not get shares, while others get them only to sell quickly.
10. Technological and infrastructure gaps: Online trading, clearing and settlement systems are still developing and sometimes fail during heavy trading.
11. Political and economic instability: Frequent changes in government, budget and monetary policy create uncertainty and shake investor confidence.
12. Narrow product range: Derivatives, bonds and debentures are almost absent; only ordinary shares are actively traded.
13. High dependence on a few sectors: Banking and insurance scrips dominate, so the index is not a true picture of the whole economy.

Conclusion

Brokers and dealers together give the stock market its life — brokers bring investors and orders, dealers bring liquidity and price continuity. But the Nepalese stock market suffers from thin trading, manipulation, weak regulation, poor disclosure and low financial literacy. Reforms such as stronger SEBON supervision, more listed companies, growth of institutional investors, better technology and investor education are needed to make the market efficient and trustworthy.

Meaning of Insurance

Insurance is a contract (called a policy) between two parties — the insurer (insurance company) and the insured (the person or firm buying protection) — under which the insurer, in return for a payment called the premium, agrees to compensate the insured for a specified loss arising from an uncertain event. The document containing the terms of this contract is the policy, and the amount paid as compensation is the sum insured.

In simple words, insurance is a device of risk sharing: many persons exposed to a similar risk contribute small amounts (premiums) into a common fund, and the few who actually suffer loss are compensated out of that fund. It converts an uncertain, heavy loss into a certain, small cost. Its basic principle is that of co-operation — "the losses of the few are shared by the many."

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Nature of Business of Different Types of Insurance

Insurance business is broadly divided into two main branches: life insurance and non-life (general) insurance. The nature of business of each type is explained below.

1. Life Insurance

Life insurance is a contract under which the insurer pays a certain sum either on the death of the insured or on his surviving a specified age, in exchange for regular premiums. Its nature of business is as follows:

• Not a contract of indemnity: Human life cannot be valued in money, so the sum insured is fixed by agreement between the parties. The insurer pays the full sum insured, not the actual loss.
• Long-term contract: Policies run for many years (10, 20, 30 years or whole life), so premiums are collected over a long period.
• Certain event: Death is certain; only its timing is uncertain. Hence the insurer must ultimately pay the claim.
• Savings element: Besides protection, life insurance is a form of compulsory saving — the insured gets back the sum insured with bonus on maturity.
• Types of policies: Whole life, endowment, term, money-back, annuity and pension plans.
• Investment of funds: Premiums collected are invested in long-term securities, government bonds and shares, since claims fall due only in the distant future.
• No physical loss: Only financial loss to the family is covered, not damage to property.

2. Non-Life (General) Insurance

Non-life insurance covers risks other than life. Its nature of business is as follows:

• Contract of indemnity: The insured is compensated only to the extent of the actual loss suffered, and never more than the sum insured. This prevents the insured from profiting from loss.
• Short-term contract: Policies are usually for one year and must be renewed periodically.
• Uncertain event: The event insured against (fire, accident, theft) may or may not happen.
• Wide coverage: It covers property, liability and personal accident risks. Main types are:

3. Re-Insurance

When an insurer transfers part of its risk to another insurer to reduce its own liability, it is called re-insurance. Its nature of business is wholesale insurance — it deals with insurance companies rather than individual policyholders, and it spreads risk across countries.

4. Social Insurance

Insurance run by the government on a compulsory, non-profit basis to protect weaker sections of society (old-age pension, unemployment benefit, employees' provident fund) is called social insurance. Its nature is welfare-oriented rather than profit-oriented.

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Conclusion

Thus, insurance is a co-operative device of risk sharing based on the law of large numbers. Life insurance is a long-term, non-indemnity contract with a savings element, while general insurance is a short-term contract of indemnity covering property and liability risks. Together they protect individuals and business firms from uncertain losses and contribute to capital formation and economic stability.

Given: Price = Rs 20,00,000; down payment 20%; $n = 20 \times 12 = 240$ months; $i = 6\%/12 = 0.005$.

(a) Down payment = 20% × 20,00,000 = Rs 4,00,000

(b) Mortgage loan = 20,00,000 − 4,00,000 = Rs 16,00,000

(c) Monthly payment

$PMT = 16{,}00{,}000 \times \frac{0.005}{1-(1.005)^{-240}} = 16{,}00{,}000 \times 0.0071643 \approx \text{Rs } 11{,}462.90$

(d) 37th payment

Balance after 36 payments (204 payments remain):

$B_{36} = PMT \times \frac{1-(1.005)^{-204}}{0.005} \approx \text{Rs } 14{,}63{,}783$

Interest in 37th payment = $14{,}63{,}783 \times 0.005 \approx$ Rs 7,318.92

Principal in 37th payment = 11,462.90 − 7,318.92 ≈ Rs 4,143.98

(e) Balance after 50 months (190 payments remain):

$B_{50} = PMT \times \frac{1-(1.005)^{-190}}{0.005} \approx \textbf{Rs } 14{,}03{,}844$

(f) Total interest over the life of the loan

Total paid = 11,462.90 × 240 ≈ Rs 27,51,095

Interest = 27,51,095 − 16,00,000 ≈ Rs 11,51,095

Given: Portfolio value = Rs 10,00,000, no liabilities, 10,000 shares outstanding.

(a) NAV per share = (Assets − Liabilities) / Shares outstanding = 10,00,000 / 10,000 = Rs 100

(b) Rs 5,000 deposited buys 5,000/100 = 50 new shares; Rs 1,000 withdrawn redeems 1,000/100 = 10 shares (prices unchanged, so NAV stays Rs 100).

Change in shares = 50 − 10 = +40 shares

(c) Shares outstanding at day end = 10,000 + 40 = 10,040 shares

(d) Portfolio value at day end = 10,00,000 + 5,000 − 1,000 = Rs 10,04,000

(e) New NAV = 10,04,000 / 10,040 = Rs 100 (unchanged, since security prices did not move and deposits and withdrawals are made at NAV).

(f) If the portfolio value doubles to Rs 20,00,000 with 10,000 shares, the NAV per share would be 20,00,000 / 10,000 = Rs 200, so the beginning-of-day NAV in (a) would be Rs 200 instead of Rs 100.