Financial Assets

Real assets are physical or tangible assets such as land, buildings, machinery and gold that directly produce goods and services; their value comes from their own use. Financial assets are paper or electronic claims on the income or assets of someone else, such as shares, bonds and bank deposits; they do not produce goods themselves but give their holder a right to future cash flows.

Fixed income securities are financial instruments, such as bonds, debentures and treasury bills, that pay the investor a fixed, pre-determined amount of interest at regular intervals and return the principal on maturity. Their return does not depend on the profit of the issuer.

(a) Shareholders' equity is the sum of share capital, share premium and retained earnings:

$\text{Equity} = 3{,}000{,}000 + 2{,}000{,}000 + 1{,}000{,}000 = \text{Rs } 6{,}000{,}000$

(b) Book value per share is equity divided by the number of shares outstanding:

$\text{BVPS} = \frac{6{,}000{,}000}{50{,}000} = \text{Rs } 120$

The book value per share is Rs 120.

(b) Treasury bills

Treasury bills are short-term (up to one year) instruments issued by the government to raise funds in the money market. Ordinary shares, debentures and preference shares are long-term securities traded in the capital market.

Features of Financial Assets (any five)

1. Liquidity – Financial assets can be converted into cash quickly and at low cost. For example, shares, debentures and government securities can be sold in the stock market and turned into cash within a short time. This makes them more liquid than physical assets like land or buildings.

2. Marketability (Transferability) – Financial assets can be easily bought and sold in the financial market. Ownership can be transferred from one person to another simply by sale or endorsement. For example, shares of a company listed on the stock exchange can be transferred through a simple sale transaction.

3. Divisibility – Financial assets can be divided into small units. An investor with a small amount of savings can buy a few shares or units of a mutual fund. This allows even small savers to invest and diversify their holdings.

4. Income (Return) Generation – Financial assets generally earn income for the holder in the form of interest, dividend or capital gain. For example, debentures earn fixed interest, shares earn dividend, and mutual fund units may earn both dividend and capital appreciation.

5. Risk and Return Relationship – Financial assets carry varying degrees of risk, and return is generally linked to risk. Assets with higher risk, such as equity shares, offer the possibility of higher returns, while low-risk assets like government bonds offer lower but safer returns. Thus the investor must balance risk against expected return.

Other acceptable features: liquidity, marketability, divisibility, income generation, risk–return trade-off, collateral value, tax benefits, and hedge against inflation.

Distinction between Money Market and Capital Market

Note: Any five of the above bases may be written as required by the question.

Financial Assets

Financial assets are claims held by one party against the income or wealth of another party. They are intangible assets whose value is derived from a contractual claim — such as a bank deposit, a share, a bond or a government security. Unlike physical (real) assets such as land, buildings or machinery, financial assets do not produce goods directly; they represent a right to receive future cash flows or a share of ownership. They are created and traded in the financial market, which channels idle savings into productive investment.

Types of Financial Assets Available in the Nepalese Financial Market

1. Bank Deposits Deposits with commercial banks and other financial institutions are the most common and safest financial asset in Nepal. They include current, savings and fixed deposits. A depositor lends money to the bank and earns interest (except on current deposits). They are highly liquid, low-risk, and insured up to Rs 5,00,000 per depositor per institution by the Deposit and Credit Guarantee Fund. Their main drawback is a low rate of return, often below the inflation rate.

2. Corporate Shares (Equity Securities) Shares represent ownership in a company and are traded on the Nepal Stock Exchange (NEPSE). They may be ordinary shares, which carry voting rights and variable dividends, or preference shares, which carry a fixed dividend and priority in repayment. Investors earn through dividends and capital gains from price appreciation. Shares offer high returns but carry high market risk. Nepal has a growing base of listed companies and a large number of retail investors through Mero Share and broker accounts.

3. Government Securities (Treasury Bills and Development Bonds) These are debt instruments issued by Nepal Rastra Bank on behalf of the Government of Nepal. Treasury bills are short-term (91, 182 and 364 days) and are sold at a discount, while development bonds are longer-term and carry periodic interest. They are virtually risk-free, as they are backed by the government, and are used mainly by banks and institutions for safe investment and liquidity management. Their yield is lower than that of shares but higher than ordinary savings deposits.

4. Corporate Bonds and Debentures These are long-term debt instruments issued by companies to raise loan capital. The holder receives a fixed rate of interest and repayment of principal on maturity. They may be secured (debentures) or unsecured, and convertible or non-convertible. They offer a steady income and rank above shares for payment, but the market for corporate bonds in Nepal is still small compared to shares and government securities.

(Other acceptable examples: mutual fund units, insurance policies, foreign exchange, derivatives.)

Importance of Financial Assets in Economic Development

1. Mobilisation of Savings: They provide attractive and safe avenues for households to save, and these savings are transferred through financial institutions to investors, raising the rate of capital formation.
2. Capital Formation and Investment: By converting small scattered savings into large investable funds, financial assets finance industry, infrastructure and agriculture, which directly supports growth.
3. Liquidity and Efficient Allocation: Financial assets are transferable and marketable, so funds can be shifted quickly from low-return to high-return uses, improving the productivity of capital.
4. Development of Financial Market: A wide range of instruments such as shares, bonds and treasury bills deepens the stock market and banking system, strengthens monetary policy transmission, and mobilises domestic resources for national development.

Meaning. An ordinary (equity) share represents a unit of ownership in a company. Ordinary shareholders are the real owners of the company; they bear the highest risk and receive dividends and residual claims after all other obligations are met.

Features

1. Ownership and voting rights. Holders elect the board and vote on important matters at general meetings.
2. Residual claim. They are paid dividends only after preference shareholders and creditors; the dividend is not fixed and depends on profit.
3. Limited liability. A shareholder's loss is limited to the amount unpaid on the shares held.
4. No maturity. The share is a permanent source of capital and is not repaid in the company's life, except on liquidation or buyback.
5. Transferability. Shares of a public company can be freely sold in the stock market.
6. Pre-emptive right. Existing shareholders get the first right to buy new shares.
7. Capital gain potential. Higher profits and growth can raise the market price of the share.

Book value per share = shareholders' equity / number of shares. Creditors, outstanding expenses and debentures are liabilities and are not part of equity.

(a) Equity before further issue:

$\text{Equity} = 8{,}00{,}000 + 2{,}00{,}000 = \text{Rs } 10{,}00{,}000$

$\text{BVPS} = \frac{10{,}00{,}000}{8{,}000} = \text{Rs } 125$

(b) The remaining shares are $10{,}000 - 8{,}000 = 2{,}000$ shares. Issued at Rs 120, they raise

$2{,}000 \times 120 = \text{Rs } 2{,}40{,}000$

New equity $= 10{,}00{,}000 + 2{,}40{,}000 = \text{Rs } 12{,}40{,}000$, and shares $= 10{,}000$:

$\text{BVPS} = \frac{12{,}40{,}000}{10{,}000} = \text{Rs } 124$

The book value per share is Rs 125 before and Rs 124 after the new issue; it falls slightly because the new shares are issued below the existing book value of Rs 125.