Notes to the Consolidated Financial Statements 25. Financial Risk Management Objectives and Policies (i) Interest rate risk (ii) Credit risk (iii) Liquidity risk Dollar amounts are in thousands of Canadian dollars (except share and per share amounts) The Company’s principal financial liabilities are comprised of mortgages, construction loans, debentures and trade payables. The main  purpose of these financial liabilities is to finance the Company’s investment properties and operations. The Company has various financial  assets such as trade receivables and cash, which arise directly from its operations. The Company may also enter into derivative transactions, primarily natural gas and oil swap contracts, to manage the price risk arising from  fluctuations in these commodities. The Company did not enter into any derivative transactions in 2013 or 2012. It is, and has been, the  Company’s policy that no speculative trading in derivatives shall be undertaken. The main risks arising from the Company’s financial instruments are interest rate risk, credit risk, and liquidity risk. These risks are managed  as follows: The Company is exposed to interest rate risk as a result of its mortgages and loans payable, however this risk is mitigated through the  Company’s strategy to have the majority of its mortgages payable in fixed‑term arrangements. The Company also structures its financings  so as to stagger the maturities of its debt, minimizing the Company’s exposure to interest rate volatility in any one year. As at December 31, 2013, no mortgages or vendor debt had floating interest rates except for four demand loans totaling$3.9 million.  These loans have an interest rate of prime plus 1.0% ‑ 2.0% (December 31, 2012 ‑ prime plus 1.0% ‑ 1.5%). Killam also has one construction  loan of $14.8 million with a floating interest rate of prime plus 0.75% and consequently, Killam is exposed to short‑term interest rate risk on  this loan. An annualized 100 basis point change in the interest rate on Killam’s entire mortgage and vendor debt at December 31, 2013, would affect  financing costs by approximately $7.1 million per year. However, only $141.4 million of Killam’s fixed mortgage and vendor debt matures in  the next twelve months. Assuming these mortgages are refinanced at similar terms, except at a 100 basis point increase in interest rates,  financing costs would increase by $1.4 million per year. Credit risk arises from the possibility that tenants may experience financial difficulty and be unable to fulfill their lease term commitments. The Company mitigates the risk of credit loss through the diversification of its existing portfolio and limiting its exposure to any one tenant. Credit assessments are conducted with respect to all new leasing and the Company also obtains a security deposit to assist in potential  recovery requirements. In addition, the receivable balances are monitored on an ongoing basis with the result that the Company’s  exposure to bad debt is not significant. The Company’s bad debt expense experience has historically been less than 0.4% of revenues. None of Killam’s tenants account for more than 1% of the tenant receivables as at each of the year‑ends presented in these financial  statements. The maximum exposure to credit risk is the carrying amount of each class of financial assets as disclosed in this note. Management manages the Company’s cash resources based on financial forecasts and anticipated cash flows. The Company structures  its financings so as to stagger the maturities of its debt, thereby minimizing the Company’s exposure to liquidity risk in any one year. In  addition, the Company’s apartments qualify for CMHC insured debt, thereby reducing the refinancing risk on mortgage maturities. The  Company’s MHCs do not qualify for CMHC insured debt, however, they continue to have access to mortgage debt. Management does not  anticipate liquidity concerns on the maturity of its mortgages as funds continue to be accessible in the multi‑residential sector. 92  Killam ProPerties inc | 2013