NCERT MOST IMPORTANT QUESTIONS CLASS – 12 | BUSINESS STUDIES IMPORTANT QUESTIONS | CHAPTER – 10 | FINANCIAL MARKET | EDUGROWN |

In This Post we are  providing Chapter- 10 FINANCIAL MARKET NCERT MOST IMPORTANT QUESTIONS for Class 12 BUSSINESS STUDIES which will be beneficial for students. These solutions are updated according to 2021-22 syllabus. These MCQS  can be really helpful in the preparation of Board exams and will provide you with a brief knowledge of the chapter

NCERT MOST IMPORTANT QUESTIONS ON FINANCIAL MARKET

1.Give the meaning of the following money market instruments
(i)Certificate of deposit; and
(ii)Commercial bill
Ans. (i) Certificate of deposit These are short-term, unsecured, negotiable instruments in bearer form.They are issued by commercial banks or development financial institution to individuals, corporations and companies. These are issued generally in times of tight liquidity when the deposit growth of banks is slow but the demand for credit is high, to mobilise large amounts of money for short periods.
(ii) 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, whijch is used to finance the credit sale of the firms. When goods are sold on credit, seller draws the bill of exchange on the buyer. On being accepted by the buyer, it becomes a trade bill, which is a marketable instrument. On being discounted from the bank, the trade bill becomes the commercial bill.

2.Give the meaning of the following money market instruments
(i)Treasury bill; and
(ii)Call money
Ans. (i) Treasury bill Also known as zero coupon bond, an T-Bill is issued by RBI on behalf of Central Government to meet its short-term requirement of funds It is issued in form of promissory note.
They are highly liquid and have negligible risk. They are issued at discount and redeemed at par, e.g. 91 days, treasury bill of face value of ? 1,00,000 is purchased at ? 96,000 and at the maturity investor gets ? 1,00,000, ? 4000 being the interest received by him.
(ii) Call money Call money is a short-term finance repayable on demand, with a maturity of 1 to 15 days. It is used for inter bank transactions. Banks have to maintain a minimum cash balance known as Cash Reserve Ratio. RBI changes this ratio from time to time.
Call money is a method by which banks borrow from each other to be able to maintain Cash   Reserve Ratio. The interest paid on call money loans is called call rate, which is vary volatile and changes even from hour to hour.

3.Financial market plays an important role in the allocation of scarce resources in an
economy by performing various functions. Explain any three functions of financial market. (Delhi 2014)
Ans. Financial market plays an important role in the allocation of scarce resources in an economy by
performing these important factions:
(i) Mobilisation of savings and channeling them into the most productive uses A financial market facilitates the transfer of savings from savers to investors. Thus, it will help in channelising surplus funds into the most productive uses.
(ii)Facilitating price discovery Interaction between supplier and investor helps to establish a price for the financial asset which is being traded in that market.
(iii) Providing liquidity to financial assets Financial market facilitates easy purchase and sales of financial assets. In doing so, they provide liquidity which means these assets are converted into cash whenever required.

4.What is meant by primary market? Explain any two methods of floating new issues in the primary market.
Ans. Primary market is the market where securities are being issued for the first time. Therefore, it is also known as ‘New Issue Market’ (NIM).

Methods of floatation are as follows:
(i) Offer through prospectus Under this method, company issues a prospectus to inform and attract general public. In prospectus, company provides details about the purpose for which funds are being raised, past financial performance of the company, background and future prospects of company.
(ii) e-IPOs It is the new method of issuing securities through online system of stock exchange. In this, company has to appoint registered brokers for the purpose of accepting applications and placing orders. The issuer company has to apply for listing of its securities and the leading manager coordinates all the activities of these issues through various intermediaries.

5.Nature of money market can be well explained with the help of its features. State any three such features of money market.
Ans. The features of the money market are: (Any three)
(i) Instruments Money market raises funds by wide variety of short-term securities such as call money, treasury bills, trade bills, commercial paper, certificate of deposit, etc.
(ii) Duration Money market provides funds for a period of less than one year.
(iii) Participant The participants in the money market are large institutional investors such as Reserve Bank of India (RBI), commercial banks, financial institutions, non-banking finance companies, state government, large corporate houses, etc.
(iv)Investment outlay Investment in money market entails huge sum of money as the instruments are quite expensive.
(v)Liquidity Money market instruments enjoy a high degree of liquidity as there is a formal arrangement for it. The Discount Finance House of India (DFHI) has been established for the specific objective of providing a ready market for money market instruments.
(vi)Expected return The expected rate of return of the money market is generally low as money is invested for a short duration.

6.Nature of a capital market can be well explained with the help of its features. State any three such features of a capital market.
Ans. The features of a capital market are: (Any three)
(i) Link between savings and investment opportunities Capital market is a crucial link between saving and investment process. The capital market transfers money from savers to entrepreneurial borrowers.
(ii) Long-term funds Capital market is concerned with medium-term and long-term funds. Funds raised through capital market are used for long-term financial needs such as procurring plant, machinery, land, etc.
(iii) Participants Both individual investors and institutional investors participate in capital market.
(iv) Instruments The main instruments of a capital market are equity shares, preference shares, bonds and debentures.

7.Differentiate between capital market and money market on the basis of the following
(i)Meaning (ii)  Liquidity
(iii)Safety   (iv)  Expected return
(v) Duration  
or
Differentiate between capital market and money market on the basis of the following
(i)Participants (ii) Instruments
(iii)Duration  (iv)  Investment outlay
 (v) Liquidity    (All India 2014 C)
Ans. Differences between capital market and money market are:

8.What is meant by capital market ? Name the two types of capital market and differentiate between the two on any four basis
or
Difference between ‘Primary Market’ and ‘Secondary Market’ on any five basis. (Ail India 2014)
Ans. Capital market refers to facilities and institutional arrangements through which long-term fund, both debt and equity are raised and invested. The capital market consists of development banks, commercial banks and stock exchanges.
The two types of capital market are
(i) Primary market or new issue market (NIM)
(ii) Secondary market or stock exchange

9.Financial market plays an important role in the allocation of scarce resources in an economy by performing many important functions. Explain any four such functions.
or
Explain any three functions of financial market.
or
Explain any four functions of financial market.
or
What is meant by financial market? Explain any two functions of financial market.
or
Describe any four functions of financial market.
Ans. Meaning of financial market It is a link between the savers and the borrowers. This market transfers money or capital from those who have surplus money to those who are in need of money.
The functions of financial market are:
(i) Facilitating price discovery In the financial market, households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
(ii)Provides liquidity to financial assets The investors can invest their money, wherever they desire, in securities through the medium of financial market and convert them into cash by selling their financial assets through the mechanism of financial market.
(iii)Reduce the cost of transactions Financial market provides complete information regarding price, availability and cost of various financial securities. So, investors and companies do not have to spend much on getting this information.
(iv)Mobilisation of savings and channelising them into most productive uses A  financial  market facilitates the transfer of savings from savers to investors. It gives savers a wide choice of making investments and thus, channelise surplus funds into productive uses.

10.Explain any four methods of floating new issues in the primary market.
or
Explain any four methods of flotation of new issues in the primary market.
Ans. There are various methods of floating new issues in the primary market: (Any four)
(i) Offer through prospectus Under this method, company issues a prospectus to inform and attract general public. In prospectus, company provides details about the purpose for which funds are being raised, past financial performance of the company, background and future prospects of company.
(ii)Offer for sale Under this method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses on stock brokers at a fixed price.
(iii)Private placement Under this method, company sells the securities to some selected institutional investors (like UTI, LIC, etc) and some individuals.
(iv) e-IPOs It is the new method of issuing securities through on line system of stock exchange. In this, company has to appoint registered brokers for the purpose of accepting applications and placing orders.
(v)Right issue This is a right (or privilege) to existing shareholders to subscribe to a new issue of shares in proportion to the number of shares held by them.