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Kv Mortgage Fund Inc. 9. Financial instruments: (a) Interest rate risk: Interest rate risk is the risk that the fair value or future cash flows of the mortgage loan investments will fluctuate because of changes in market interest rates. As of February 28, 2013, no mortgage investments (February 29, 2012 – $nil) bear interest at variable rates, therefore, as at February 28, 2013 the Fund is not exposed to cash flow risk as a result of interest rate fluctuations. Further, the Fund does not have material fair value risk on its mortgage investment portfolio primarily as a result of the short term nature of the maturity dates of the mortgage loan investments. The Fund does not have material interest rate risk on any of its other financial instruments. (b) Credit risk: Credit risk primarily relates to the possibility that counterparties to mortgage investments may be unable to honour their debt commitments as a result of a negative change in market conditions that could result in a loss to the Fund. The Fund mitigates this risk by the following: (i) adhering to the investment restrictions and operating policies included in the asset allocation model; (ii) performing a due diligence process on each mortgage loan investment prior to funding. This generally includes, but is not limited to engaging professional independent consultants, lawyers and appraisers and performing credit checks and financial statement review on prospective borrowers; (iii)having mortgage investments approved by the independent review committee in accordance with the Fund's operating policies; and (iv)actively monitoring the mortgage portfolio and initiating recovery procedures in a timely manner where required. The maximum exposure to credit risk at February 28, 2013 is the fair values of the Fund's accrued interest receivable and mortgage loan investments, which total $13,120,419 (February 29, 2012 – $7,920,344). The Fund has recourse under its mortgage loan investments in the event of default by a borrower; in which case, the Fund would have a claim against the underlying property and security. As of February 28, 2013 the Fund is not engaged in any enforcement remedies. (c) Liquidity risk: Liquidity risk is the risk that the Fund will encounter difficulty in meeting its financial obligations as they become due. This risk arises in normal operations from fluctuations in cash flow as a result of the timing of mortgage loan investment fundings and repayments and redemptions of shares. The Fund Manager routinely forecasts future cash flow sources and requirements to help mitigate this risk and ensure cash is efficiently utilized. (d) Fair values: In accordance with Canadian GAAP, the Fund must classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making its fair value measurements. The following hierarchy has been used in determining and disclosing fair value of financial instruments: • Level 1 – quoted prices in active markets for the same instrument (i.e. without modification or repackaging); • Level 2 – quoted prices in active markets for similar assets or liabilities or other valuation techniques for which all significant inputs are based on observable market data; and • Level 3 – valuation techniques for which any significant input is not based on observable market data. 41

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