Table of Contents
Short answer Type Question:
Q.1What are the functions of a financial market?
ANSWER: A financial market is a market for the creation and exchange of financial assets such as shares and debentures. A financial market performs the following functions.
i) Savings mobilization and channeling into the most productive uses. A financial market serves as a conduit between savers and investors. It serves as a channel for the transfer of savings from households to investors. It provides savers with a variety of investment options, assisting in the allocation of surplus funds to the most productive use.
ii) Make Price Discovery Easier. The price of a financial asset, like a commodity, and generally determined by the forces of demand and supply for funds. The financial market serves as a platform for the interaction of fund demand (represented by business firms) and fund supply (represented by the households). As a result, it aids in determining the price of the traded asset.
iii) Gives Financial Assets Liquidity. In a financial market, an asset or security can be easily bought and sold. This gives the assets liquidity. That is, assets can be easily converted into cash or cash equivalents through financial market trading.
iv) Reduce Transaction Costs. Financial markets provide useful information about the securities that are traded on the market. It saves time, effort, and money that both buyers and sellers of a financial asset would otherwise have to spend trying to find each other. As a result, the financial market serves as a common platform where buyers and sellers can meet to meet their individual needs.
Q.2 ”Money Market is essentially a Market for short term funds”. Discuss.
ANSWER: The money market is a market for trading short-term securities and funds. Money market securities have a very short maturity period ranging from one day to one year. These assets can be used as a close substitute for cash or money. These are also called as ‘Near Money instruments’ due to their short maturity period. These instruments are considered as an vital source of financing for working capital needs. They have a high level of liquidity. DFHI offers a discount on money market securities and a ready market for them. Furthermore, securities traded in the money market are safe and secure because transactions are made in instruments issued by financially strong financial institutions and companies. Treasury bills, commercial paper, call money, certificates of deposit, and other common instruments traded in the money market include treasury bills, commercial paper, call money, certificates of deposit, and so on.
Q.3 What is a Treasury Bill?
ANSWER: The Reserve Bank of India issues Treasury Bills on behalf of the Central Government of India. They are issued to meet the Government of India’s short-term funding needs. Treasury Bills have maturities ranging from 14 to 364 days. These bills are typically introduced by commercial banks, LICs, UTIs, non-banking financial institutions, and so on. They’re also known as Zero-Coupon Bonds. Treasury bills are highly liquid instruments because the RBI is always willing to purchase them. Furthermore, because they are issued by the RBI, they are regarded as the safest instrument. They are available for a minimum of Rs 25,000 and in multiples of that amount. Treasury Bills are issued at a discount, that is, at a lower price than the face value, and are redeemed at par. The interest received during redemption is denoted by the discount (the difference between the issue price and the redemption value). The purpose of issuing T-Bills is to meet the government’s short-term money borrowing needs. T-bills have several advantages over other bills, including:
1. They have a zero risk weighting because of issuance by the government, and on the other hand sovereign papers carry no risk.
2. High liquidity because the maturities are 91 and 364 days, respectively.
3. Accountability.
4. Because T-Bills have a very active secondary market, they have a higher degree of tradability.
Q.4 Distinguish between Capital Market and Money Market.
ANSWER: The following points highlight the difference between Capital Market and Money Market:
| Basis of difference | Capital Market | Money Market |
| Time Span of Securities | The capital market is primarily concerned with the trading of medium and long-term securities with maturities of more than one year. | This Market is usually concerned with the short-term trading of securities with maturities ranging from one day to a maximum of one year. |
| Liquidity | Capital market securities are liquid in the sense that they can be traded on stock exchanges, but they are less liquid than money market securities. | The traded securities are extremely liquid. DFHI offers a discount on money market securities and a ready market for them. |
| Return expected | Because of the possibility of long-term and regular dividends or bonuses, expected returns are higher. | Because of the shorter duration, expected returns are lower. |
| Instruments | Equity shares, preference shares, debentures, bonds, and other long-term securities are among the instruments traded in the capital market. | Treasury bills, commercial bills, certificates of deposit, and other short-term securities are among the instruments traded in the money market. |
| Risk | In terms of principal repayment, capital market securities carry a higher level of risk. | The securities here are less risky due to the short time period and the issuers’ strong financial position. |
Q.5 What are the functions of a Stock Exchange?
ANSWER: The term “stock exchange” refers to a market where existing securities are bought and sold. The primary functions of a stock exchange are as follows.
(i) Provides Liquidity and Marketability: The stock exchange provides a ready-to-trade platform for existing securities. In another way we can say, it provides a continuous market for the sale and purchase of securities. Securities can be easily converted into cash via stock exchange whenever needed. Furthermore, long-term securities can be converted to medium-term and short-term securities via stock exchange.
(ii) Determination of Prices: A stock exchange aids in determining the value of the monetary assets traded in that market. It provides a platform for interaction between buyers and sellers of securities, assisting in the determination of securities prices through the forces of demand and supply.
(iii) Fair and Safe Market: As a legal and well-regulated market, the stock exchange. It operates within the boundaries of the defined and existing legal framework. As a result, it ensures transactional safety and fairness.
(iv) Facilitates Economic Growth: Securities are constantly bought and sold on a stock exchange. This ongoing process of disinvestment and reinvestment aids in directing savings and investments to the most productive uses. This boosts capital formation as well as economic growth.
(v) Spreading Equity Cult: A stock exchange can help educate people about investing by regulating issues and improving trading practices. It encourages and promotes people to invest in ownership securities.
(vi) Acts as an Economic Barometer: A stock exchange reflects changes in economic conditions through changes in share prices. For example, the rise (or fall) in share prices reflects a boom (or recession).
(vii) Scope for Speculation: It is widely assumed that some degree of speculation is required for improved liquidity and the maintenance of demand and supply for securities. Within the confines of the law, the stock exchange allows for a reasonable and controlled scope of speculation.
Q.6 What are the objectives of the SEBI?
ANSWER: The Securities and Exchange Board of India (SEBI) was formed to promote the orderly and healthy growth of India’s securities market. The following points highlight SEBI’s overall goals:
1.To regulate the stock exchanges market as well as the securities industry in order to ensure their smooth operation.
2. To protect and guide individual investors’ rights and interests, as well as to educate and guide them.
3. To prevent trading malpractices and strike a balance between the securities industry’s self-regulation and statutory regulation.
4. Regulating as well as developing a code of conduct and fair practices for intermediaries such as brokers, merchant bankers, and so on. , in order to make them more competitive and professional.
Q.7 State the objectives of the NSE.
ANSWER: The National Stock Exchange of India was established in 1992. It was established as a stock exchange in 1993 and began operations in 1994. It was founded by major banks, financial institutions, insurance firms, and financial intermediaries. NSE was founded with the following goals in mind.
(i) The NSE aimed to establish a single nationwide trading system to provide trading in all types of securities. This type of system boosts investor confidence.
(ii) It ensured that all investors throughout the country have easy and equal access to a suitable communication network. It improves the security’s liquidity. In the transaction, the people involved were limited under the regional stock exchange system. In contrast, the NSE incorporates transactions from all over the country, increasing the liquidity of the securities.
(iii) The NSE aims to provide a fair, efficient, and transparent securities market by utilizing an electronic trading system. Anyone can obtain information about the trading of various securities from the NSE’s local terminals. As a result, it aids in the reduction of trading fraud.
(iv) One of the NSE’s goals is to enable shorter settlement cycles and book entry settlements.
(v) The NSE aimed to meet international stock exchange standards and benchmarks.
Long Answer Type Questions:
Q.1 Explain the various money Market Instruments.
ANSWER: Money Market Instruments
(i) Treasury Bill
A treasury bill is an instrument of short term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by Reserve Bank of India on behalf of the Central Government to meet its short term requirements of funds. They are issued in the form of a promissory note. They are highly liquid and issued at a price which is lower than their face value and repaid at par. Treasury bills are available for a minimum amount of Rs.25,000.
(ii) Commercial Paper
Commercial paper is a short term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days
to one year. The issuance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be finally strong. It is sold at discount and redeemed at par.
(iii) Call Money
Call money is a short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Commercial Banks have to maintain a minimum cash balance known as cash reserve ratio. Call money is a method by which banks borrow from each other.
(iv) Certificate of Deposit
Certificates of deposit are unsecured, negotiable, short term instruments in bearer form, issued by Commercial Banks and development financial institutions. They can be issued to individuals, corporations and companies during periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high. They help to mobilise a large amount of money for short periods.
(v) A Commercial Bill
A commercial bill is a bill of exchange used to finance the working capital requirements of business firms. It is a short term negotiable, self-liquidating instrument which is used to finance the credit sales of firms, when goods are sold on credit, the buyer becomes liable to make payment on a specific date in future.
Q.2 What are the methods of floatation in Primary Market?
ANSWER: The primary market is also known as the new issues market. It deals with new securities being issued for the first time. There are various methods of floating new issues in the primary market
(i) Offer Through Prospectus
This involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital, through an advertisement in newspapers and magazines. The issues may be under written and also required to be listed on at least one stock exchange. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines.
(ii) Offer for Sale
Under this method securities are not issued directly to the public but offered for sale through intermediaries like issuing houses or stock brokers. In this case, company sells securities enblock at an agreed price to brokers who, in turn, resell them to the investing public.
(iii) Private Placement
Private placement is the allotment of securities by a company to institutional investors and some selected individuals. It helps to raise capital more quickly than a public issue. Access to the primary market can be expensive on account of various mandatory and non-mandatory expenses.
(iv) Rights Issue
This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholder are offered the ‘right’ to buy new shares in proportion to the number of shares they already possess.
(v) e-IPOs
A company proposing to issue capital to the public through the on-line system of the stock exchange has to enter into an agreement with the stock exchange. This is called an Initial Public Offer (IPO). SEBI registered broker’s have to be appointed for the purpose of accepting applications and placing orders with the company the issuer company should appoint a registrar to the issue having electronic connectivity with the exchange. The issuer company can apply for listing of its securities on any exchange other than the exchange through which it has offered its securities. The lead manager co-ordinates all the activities amongst intermediaries connected with the issue.
Q.3 Explain the Capital Market reforms in India.
ANSWER: The National Stock Exchange is the latest, most modern and technology driven exchange. NSE has setup a nationwide fully automated screen based trading system. The NSE was setup by leading financial institutions, banks, insurance companies and others financial intermediaries. It is managed by professionals, who do not directly or indirectly trade on the exchange. The trading rights are with the trading members who offer their services to the investors. The Board of NSE comprises senior executives from promoter institutions and eminent professionals, without having any representation from trading members.
Objectives of NSE
(i) Establishing a nationwide trading facility for all types of securities.
(ii) Ensuring equal access to investors all over the country through an appropriate communication network.
(iii) Providing a fair, efficient and transparent securities market using electronic trading system.
(iv) Enabling shorter settlement cycles and book entry settlements.
(v) Meeting international bench marks and standards..
Within a span of 10 year, NST was able to achieve its objectives for which it was set up. It has been playing a leading role as a change agent in transforming the Indian capital market
Q.4 Explain the objectives and functions of SEBI.
ANSWER: Objectives of SEBI
Functions of SEBI
Keeping in mind the emerging nature of the securities market in India, SEBI was entrusted with the twin task of both regulation and development of the securities market. It has certain functions
Regulatory Functions
(i) Registration of brokers and sub-brokers and other players in the market.
(ii) Registration of collective investment schemes and mutual funds.
(iii) Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the business in stock exchanges and any other securities market.
(iv) Regulation of takenover bids by companies.
(v) Calling for information by undertaking inspection conducting enquiries and audits of stock exchanges and intermediaries.
(vi) Levying for or other charges for carrying out the purposes of the act.
(vii) Performing and exercising such power under Securities Contracts Act, 1956, as may be delegated by the Government of India.
Development Functions
(i) Training of intermediaries of the securities market.
(ii) Conducting research and publishing information useful to all market segments.
(iii) Undertaking measures to develop the capital markets by adopting a flexible approach.
Protective Functions
(i) Prohibition of fraudulent and unfair trade practice like making misleading statements, manipulations, price rigging etc.
(ii) Controlling insider trading and imposing penalties for such practices.
(iii) Undertaking steps for investor protection.
(iv) Promotion of fair practices and code of conduct in securities market
Q.5 Explain the various segments of NSE.
ANSWER: NSE provides trading in the following two segments
(i) Whole Sale Debt Market Segment This segment provides a trading platform for a wide range of fixed income securities that include central government securities, treasury bills, state development loans, bonds issued by public sector undertakings, floating rate bonds, zero coupon bonds, index bonds, commercial paper, certificate of deposit, corporate debentures and mutual funds.
(ii) Capital Market Segment The capital market segment of NSE provides efficient and transparent platform for trading in equity, preference, debentures, exchange traded funds as well as retail government securities.
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