Financial Markets Class 12 Important Questions and Answers Business Studies Chapter 10

We have given these Business Studies Class 12 Important Questions Chapter 10 Financial Markets to solve different types of questions in the exam. Go through these Planning Class 12 Important Questions and Answers & Previous Year Questions to score good marks in the board examination.

Important Questions of Financial Markets Class 12 Business Studies Chapter 10

Question 1.
This market helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. Name the market and identify the function being referred to. (All India 2019)
Answer:
The market highlighted is financial market and the function being referred to as reducing the cost of transaction.

Question 2.
State any two ‘Developmental Functions’ of Securities and Exchange Board of India. (Delhi 2019)
Answer:
Two development functions of SEBI are:
(i) Training of intermediaries of the securities market.
(ii) Conducting research and publishing information useful to all market participants.

Question 3.
What is meant by ‘Allocative Function’ of financial markets? (Delhi 2019)
Answer:
Financial market helps in allocation of funds or savings from savers to investors. Thus, it helps in channelising surplus funds into most productive uses. This is the allocative function of financial market.

Question 4.
How does financial market facilitate ‘Price Discovery’ of financial assets? (Delhi 2019)
Answer:
The interaction between demand of funds by businesses and supply of funds by households helps in the price discovery of financial assets, which is being traded in a particular market.

Question 5.
An investor wanted to invest ₹ 20,000 in Treasury bills for a period of 91 days. When he approached the Reserve Bank of India for this purpose, he came to know that it was not possible.
Identify the reason why the investor could not invest in the Treasury bill. (CBSE 2018)
Answer:
The investor cannot invest in Treasury bills because it is available in the denominations of ₹ 25,000 and its multiples only.

Question 6.
‘Vani Oil Refinery’ is a large company, engaged in processing crude oil and refining it into more useful products like Petroleum, Kerosene, LPG, etc. It has build good reputation over the years. It has been consistently earning profits and paying regular dividend to its shareholders. It needs additional working capital immediately to finance a project. It expects to return this amount after seven to eight months. Ashish Batra, The Finance Manager of the company does not want to get into procedural requirment of securing finance from a Commercial Bank.
Suggest how the company can raise the require finance for meeting its additional working capital requirements. (Comportment 2018)
Answer:
For arranging finance for the purpose of additional working capital, company can use commercial bill.

Question 7.
Sika Ltd., a reputed industrial machines manufacturer, needs rupees twenty crores as additional capital to expand the business. Mr Amit Joshi, the Chief Executive Officer (CEO) of the company wants to raise funds through equity.
The Finance Manager, Mr Narinder Singh, suggested that the shares may be sold to investing public through intermediaries, as the same will be less expensive.
Name the method through which the company decided to raise additional capital. (All India 2017)
Answer:
‘Offer for sale’ is the method through which the company decided to raise additional capital.

Question 8.
Meca Ltd. a reputed automobile manufacturer needs rupees ten crores as additional capital to expand its business.
Atul Jalan, the CEO of the company wanted to raise funds through equity.
On the other hand, the Finance Manager, Nimi Sahdev said that the public issue may be expensive on account of various mandatory and non-mandatory expenses. Therefore, it was decided to allot the securities to institutional investors.
Name the method through which the company decided to raise additional capital. (Delhi 2017)
Answer:
‘Private placement’ is the method through which the company decided to raise additional capital.

Question 9.
State any one consequence of a well performed allocative function of financial market. (Delhi 2013)
Answer:
Providing liquidity to financial assets.

Question 10.
Name the two major alternative mechanisms through which allocation of funds can be done. (All India 2013)
Answer:
The two major alternative mechanisms through which allocation of funds can be done are

• Banks
• Financial markets

Question 11.
Give the meaning of secondary market. (Delhi 2013)
Answer:
Secondary market refers to market for sale and purchase of previously issued securities. It is also known as stock exchange.

Question 12.
Give the meaning of money-market. (Delhi 2013)
Answer:
Money-market refers to market for short-term funds, which deals in monetary assets whose period of maturity is upto one year.

Question 13.
State the essential function of primary market. (All India 2013)
Answer:
The important function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs, seeking to establish new enterprises.

Question 14.
What is meant by capital market? (Delhi 2013, 2011; All India 2012)
Answer:
Capital market refers to whole network of organisations and institutions through which medium and long-term funds, both debt and equity are raised and invested.

Question 15.
What is meant by ‘financial intermediation’? (Comportment 2013)
Answer:
It refers to the process of allocations of funds from savers to investors/companies with the help of various financial instruments.

Question 16.
What is meant by ‘allocative function’ performed by financial market’? (Compartment 2013)
Answer:
A financial market helps to mobilise funds between savers and investors. In this way, they perform ‘allocative function’.

Question 17.
State any one regulatory function of Securities and Exchange Board of India (SEBI). (Delhi 2012)
Answer:
SEBI prohibits insider trading and take-over bids by imposing penalties.

Question 18.
State any one protective function of Securities and Exchange Board of India (SEBI). (Delhi 2012; All India 2012)
Answer:
SEBI prohibits fraudulent and unfair trade practices like misleading statements, manipulations, price rigging, etc.

Question 19.
State any one development function of SEBI. (All India 2012)
Answer:
SEBI conducts research and publish information which is useful to all market participants.

Question 20.
State any one function of stock exchange (Delhi 2012)
Answer:
It provides liquidity and marketability to existing securities.

Question 21.
What is meant by ‘primary market’? (All India 2011)
Answer:
Primary market is the market where securities are being issued for the first time. Therefore, it is also known as ‘New Issue Market’ (NIM).

Question 22.
One of the functions of Securities and Exchange Board of India is ‘Promotion of fair practices and code of conduct in securities market’. State the category to which this function belongs and state any two other functions of this category. (All Indio 2019)
Answer:
This function comes under the category of ‘Protective Functions’.

Other functions performed are:

• Controlling insider trading and imposing penalties for the same.
• Undertaking steps for investor protection.

Question 23.
Mr Vikas Mehra was the Chairman of ‘IBM Bank’. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce the taking , over of ‘UK Bank’. Mr Vikas Mehra knew that the share price of ‘IBM Bank’ would rise on this announcement. Being a part of the Bank, he was not allowed to buy shares of the bank. He called one of his rich friends Mukand and asked him to invest ? 4 crore ill shares of his bank promising him the capital gains.

As expected, after the announcement, the share prices went up by 50% and the market price of Mukand’s shares was now ₹ 6 crore. Mukand earned a profit of ₹ 2 crore. He gave ₹1 crore to Vikas Mehra and kept ₹ 1 crore with him. On regular inspection and by conducting enquiries of the brokers involved, Securities and Exchange Board of India (SEBI) was able to detect irregularity. SEBI imposed a heavy penalty on Vikas Mehra.
Quoting the lines from the above para identify and state any two functions performed by SEBI in the above case. (All India 2016)
Or
Mr Sanjay Nehra was the Chairman of ‘Taran Bank’. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce taking over of “Vena Bank’.
Mr Sanjay Nehra knew that the share price of ‘Taran Bank’ would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He called one of his rich friends Sudhir and asked him to invest ₹ 5 crore in shares of his bank promising him the capital gains.

As expected the share prices went up by 40% and the market price of Sudhir’s shares was now ₹ 7 crore. He earned a profit of ₹ 2 crore. He gave ₹ 1 crore to Mr Sanjay Nehra and kept ₹ 1 crore with himselL On regular inspection and by conducting enquiries of the brokers
involved, Securities and Exchange Board of India (SEBI) was able to detect this irregularity. The SEBI imposed a heavy penalty on Mr Sanjay Nehra. By quoting the lines from the above para identify and state any two functions that were performed by SEBI in the above case. (Delhi 2016)
Answer:
The two functions performed by SEBI in the above case are as follows:
(i) SEBI conducts Inspections, enquiries and audit of stock exchanges. It Is one of the regulatory functions of SEBI. Lines from the above para which indicate that the above function was performed are:
“On regular inspection was …………… able to detect this irregularity.’

(ii) SEBI controls Insider trading and Imposes penalty for such practices. It is one of the protective functions of SEBI. Lines from the above para which Indicate that the above function was performed by SEBI are:
“SEBI imposed on Vikas …………… Mchra.

Question 24.
‘Stock exchange not only contributes to the economic growth, but also performs many other functions’. Explain any three such functions. (All India 2014)
Answer:
A stock exchange provides a platform for disiiwestinent and reinvestment of savings into most productive avenues. Thus. it leads to economic growth. However, stock exchange performs following functions:
(i) Provides liquidity and marketability of existing securities Stock exchange provides a ready and continuous market where securities are bought and sold It gives Investors the chance to disinvest or reinvest. Thus, regular dealing provides both liquidity and marketability to existing securities.

(ii) Pricing of securities The stock exchange helps in determining the prices of various securities that reflect their real worth. It enables correct pricing of securities through the interplay of demand and supply.

(iii) Safety of transaction The stock exchange is well regulated and its dealings are well defined according to the existing legal framework. This ensures that the investing public gets a safe and fair deal in the market.

Question 25.
Give the meaning of the following money market instruments
(i) Treasury bill; and
(ii) Call money (Comportment 2014; Foreign 2014; All India 2012)
Answer:
(i) Treasury bill Also known as zero coupon bond, a T-Bill is issued by RBI on behalf of Central Government to meet its short-term requirement of funds. It is issued in the 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, ₹ 4,000 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 very volatile and changes even from hour to hour.

Question 26.
Give the meaning of the following money market instruments
(i) Certificate of deposit; and
(ii) Commercial bill (Comportment 2014, 2012; Foreign 2014)
Answer:
(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, which 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.

Question 27.
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)
Or
Explain any three functions of financial market. (All India 2013)
Answer:
Financial market plays an important role in the allocation of scarce resources in an economy by performing these important functions: (any three)

• 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 helps in channelising surplus funds into the most productive uses.
• Facilitating price discovery Interaction between supplier and investor helps to establish a price for the financial asset which is being traded in that market.
• 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.
• 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.

Question 28.
Differentiate between the two segments of financial market on any three bases. (Comportment 2013)
Or
Differentiate between capital market and money market on the basis of the following:
(i) Meaning
(ii) Liquidity
(iii) Safety
(iv) Expected return
(v) Duration (Delhi 2014; Foreign 2014)
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 (C) 2014)
Or
Distinguish between money market and capital market on the basis of: (All India 2015)
(i) Investment outlay
(ii) Duration
(iii) Liquidity and
(iv) Instruments
Or
Distinguish between money market and capital market on the basis of: (Comportment 2015)
(i) Participants
(ii) Instruments
(iii) Safety and
(iv) Expected return
Or
Distinguish between money market and capital market on the basis of: (Comportment 2015)
(i) Participants
(ii) Instruments
(iii) Duration and
(iv) Safety
Answer:
The two segments of financial market are capital and money market: (any three)

Basis	Capital market	Money market
Meaning	It refers to the whole network of organisations, institutions and instruments that deal in medium and long-term funds.	Money market is a market for short-term funds which deals in monetary assets whose period of maturity is upto one year.
Liquidity	Only actively traded securities have ready market.	In this market, there is a formal arrangement of creating liquidity.
Safety	In this market securities of every company are bought and sold. Hence, there is more risk involved.	The transaction are made in the instruments issued by the financial institutions and financially strong companies.
Expected return	The expected returns are high as there in scope of earning capital gains and long-term prosperity is also shared by the company in form of high dividends and bonus issues.	The expected return is less due to short duration and lower risk.
Duration	Period of maturity is more than one year.	Period of maturity ranges from one day to one year.
Investment outlay	Investment outlay does not necessarily require huge investment outlay. The unit prices is low, i.e. ₹ 10, ₹ 100 and so even the trading lots are small, i.e. 5, 50,100 etc.	Money market transactions entail huge sums of money as instruments are quite expensive.
Participants	Individual investors as well as institutional investors like financial institutions, banks, corporate houses and foreign investors participate in the capital market transactions.	The participants are RBI, Commercial Banks financial institutions, mutual funds and corporate houses. Individual investors do not participate in money market.
Instruments traded	The instruments of capital market include equity shares, preference shares, bonds, debentures, etc.	Some of the main instruments used in money market are commercial paper, treasury bills, trade bills, certificate of deposit, etc.

Question 29.
State any three development functions of Securities and Exchange Board of India (SEBI). (All India 2013; Compartment 2012)
Answer:
The three development functions of SEBI are:
(i) Training of intermediaries of the securities market.
(ii) Conducting research and publishing information useful to all market participants.
(iii) Undertaking measures to develop the capital markets by adapting a flexible approach.

Question 30.
State any three protective functions of Securities and Exchange Board of India (SEBI). (All India (C) 2013)
Answer:
The three protective functions of SEBI are:
(i) Controlling insider trading and imposing penalties for such practices.
(ii) Undertaking steps for investor protection.
(iii) Promotion of fair practices and code of conduct in securities market.

Question 31.
Explain any three objectives of Securities and Exchange Board of India (SEBI). (Delhi 2011)
Or
‘To promote orderly and healthy growth of securities market and protection of investors, SEBI was set up’. With reference to this statement, explain the objectives of SEBI. (All India 2011; Delhi 2011)
Answer:
The basic objective of SEBI is to protect the interests of investors and to promote the development of stock exchange and regulate the securities market.

Following are the objectives of SEBI:

• To regulate stock exchange and securities markets to promote their orderly functioning.
• To protect the rights of investors and ensuring safety to their investment.
• To prevent fraudulent and malpractices by balancing between self regulation of business and its statutory regulations.
• To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc, so that they become competitive and professional.

Note: SEBI came into effect-due to several irregularities and malpractices. To eliminate these problems, SEBI was set-up with certain objectives of protecting the investors and development of securities market.

Question 32.
‘Foods India Ltd.’ is a company engaged in the production of packaged juice since 2010. Over this period, a large number of competitors have entered the market and are putting a tough challenge to ‘Food India Ltd.’ To face this challenge and to increase its market share, the company has decided to replace the old machinery with an estimated cost of ₹ 100 crore. To raise the finance, the company decided to issue 9% debentures. The finance department of the company has estimated that the cost of issuing the 9% debentures will be ₹ 10,00,000. The company wants to meet its flotation cost.

• Explain the instrument that the company may issue for this purpose.
• In which type of financial market, is the instrument explained in (a) above traded? Also explain how safe the instruments are in this market. (All India 2019)

Answer:

• The company can use’commercial paper’. For meaning, refer to Ans 9 (i) on page 184.
• This instrument, i.e. commercial paper is traded in money market. The instruments are safe and secure as this market contains very low risk.

Question 33.
Stock exchange acts as a regulator of the securities market. It creates a continuous market where the securities are bought and sold. It gives investors the chance to disinvest and reinvest. Through this process of disinvestment and reinvestment, savings get channelised into their most productive investment avenues. To ensure that the investing public gets a safe and fair deal in the market, the membership of the stock exchange is well regulated and its dealings are well defined according to the existing legal framework. It also ensures wider share of ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments.
Various functions performed by the Stock Exchange are discussed in the above para. By quoting lines from the above para, state any four functions of stock exchange. (Delhi 2019)
Answer:
Functions of stock exchange discussed are:
(i) Provides liquidity and marketability to existing securities:
“It creates a continuous ………….. Reinvest”.
(ii) Safety of transactions :
“To ensure that …………… legal framework.”

(iii) Contributes to economic growth :
“Through ……………. this process investment avenues.”

(iv) Spreading equity cult:
“It also ensures …………. about investments.”

Question 34.
State the protective functions of Securities and Exchange Board of India, (CBSE 2018)
Answer:
The protective functions of Securities and Exchange Board of India are:

• Prohibition of fraudulent and unfair trade practices.
• Controlling insider trading and imposing penalties for such practices.
• Undertaking steps for investor protection.
• Promotion of fair practices and code of conduct in securities market.

Question 35.
Explain the functions of financial market. (Comportment 2018, 2015)
Or
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. (Foreign 2014; All India 2011)
Or
Explain any three functions of financial market. (All India 2013; Comportment 2013)
Or
Explain any four functions of financial market. (Delhi 2012)
Or
What is meant by financial market? Explain any two functions of financial market. (All India 2011)
Answer:
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.

For the functions of financial market:
(i) The function performed by the market here is mobilisation of savings and channelising them into the most productive use/allocative function.

(ii) The other three functions of financial market are:

• 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.
• 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.
• 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.

Question 36.
These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed the most. To give strength to the economy, SEBI is undertaking measures to develop the capital market.
In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded every day. These markets together help the savers and investors in directing the available fund into their most productive investment opportunity.
(i) Name the function being performed by the market in the above case.
(ii) Name the market segment other than the capital market segment in which unsecured and short-term debt instruments are traded. Also, give any three points of difference between the two. (All India 2017)
Answer:

• The function performed by the market in the above case is Mobilisation of savings and channelising them into the most productive use or allocative function.
• Money market is the market segment where unsecured, short-term debt instruments are traded.

The three points difference between money and capital market are:

Basis	Capital market	Money market
Meaning	It refers to the whole network of organisations, institutions and instruments that deal in medium and long-term funds.	Money market is a market for short-term funds which deals in monetary assets whose period of maturity is upto one year
Liquidity	Only actively traded securities have ready market.	In this market, there is a formal arrangement for creating liquidity
Duration	Period of maturity more than one year.	Period of maturity is ranges from one day to one year

Question 37.
These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this there is another market in which unsecured and short-term debt instruments are actively traded everyday. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.
(i) Name the function being performed by the market in the above case.
(ii) Also, explain briefly three other functions performed by this market. (Delhi 2017)
Or
Explain the functions of financial market. (Compartment 2015; Delhi 2012)
Answer:
(i) The function performed by the market here is mobilisation of savings and channelising them into the most productive use/allocative function.

(ii) The other three functions of financial market are:
(a) 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.
(b) 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.
(c) 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.

Question 38.
Explain any four methods of floating new issues in the primary market. (All India 2016, 2012; Foreign 2016; Delhi [Cl 2011)
Or
What is meant by ‘primary market’? Explain any two methods of floating new issues in the primary market. (All India 2011; Delhi 2011)
Or
State any five methods of floating new issues in the primary market. (All India 2010)
Or
What is meant by ‘new issue market’? Explain various methods of flotation of new securities issues in this market. (Comportment 2018)
Answer:
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, the company issues a prospectus to inform and attract general public. In a prospectus, the company provides details about the purpose for which funds are being raised, past financial performance of the company, background and future prospects of the company.

(ii) e-EPOs It is a 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.

(iii) 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.

(iv) Private placement Under this method, company sells the securities to some selected institutional investors (like UTI, LIC, etc) and some individuals.

(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.

Question 39.
Explain any four functions of stock exchange. (Foreign 2016; Compartment 2013; Delhi 2013; All India 2012, 2011)
Or
Explain any five functions of stock exchange. (Compartment 2014, 2012)
Or
‘In today’s commercial world, the stock exchange performs many vital functions which lead the investors towards positive environment.’ Explain how, by giving any four reasons. (Delhi 2011)
Answer:
Main functions of stock exchange are as follows:
(i) Pricing of securities The stock market helps to value the securities on the basis of demand and supply factors. Higher the demand for such securities, higher is their value. The valuation of securities is useful for investors, government and creditors.

(ii) Contributes to economic growth In stock exchange, securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and economic growth.

(iii) Spreading of equity cult Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading practices and by educating people about investment.

(iv) Liquidity The main function of stock market is to provide ready market for sale and purchase of securities which assures the investors that their investment can be converted into cash whenever they want.

(v) Safety of transaction The stock exchange is well regulated and its dealings are well defined according to the existing legal framework. This ensures that the investing public gets a safe and fair deal in the market.

Question 40.
‘Ganesh Steel Ltd’ is a large and creditworthy company manufacturing steel for the Indian market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost the company decides to tap the money-market.
(i) Name and explain the money market instrument the company can use for the above purpose.
(ii) What is the duration for which the company can get funds through this instrument? (Delhi 2015)
Or
‘Mission Coach Ltd’ is a large and creditworthy company manufacturing coaches for Indian Railways. It now wants to export these coaches to other countries and decides to invest in new hi-tech machines. Since, the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market.
(i) Name and explain the money market instrument the company can use for the above purpose.
(ii) What is the duration for which the company can get funds through this instrument? (All India 2015)
Answer:

• Commercial paper It is issued as an unsecured promissory note by large and creditworthy companies for meeting their short-term needs of funds. It is a negotiable instrument, transferable by endorsement and delivery. This instrument is generally used for ‘bridge financing’, i.e. a method of financing used by companies to cover the floatation costs of issuing equity shares, preference shares, etc.
• A firm can get funds for a duration of 15 days to one year.
• Commercial paper can also be used for meeting working capital needs.

Question 41.
Keeping in mind the emerging nature of the securities market in India, Securities and Exchange Board of India (SEBI) was entrusted with the twin task of regulation and development of securities market. Out of this, state the development functions of Securities and Exchange Board of India (SEBI). (Compartment 2015)
Answer
For developmental functions of SEBI:
(a) flaining of intermediaries of the securities market.
(b) Conducting research and publishing information useful to all market participants.
(c) Undertaking measures to develop the capital markets.

Question 42.
What is meant by capital market? Name the two types of capital market and differentiate between the two on any four basis. (Comportment 2014)
Or
Difference between ‘primary market’ and ‘secondary market’ on any five basis. (All India 2014)
Or
Distinguish between primary market and secondary market. (Comportment 2015)
Answer:
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

The differences between primary market and secondary market are: (any three)

Basis	Primary market	Secondary market
Meaning	It means the market where corporate sector, government and public bodies issue securities to raise funds from the public.	It means the market where listed shares, debentures and other securities are traded for investment and speculative purposes.
Nature of securities dealt in	In primary market, new securities are traded.	In secondary market, second hand securities are traded.
Alternate name	It is also known as ‘new issues market’.	It is also known as ‘stock exchange’.
Capital formation	It promotes capital formation directly as funds flow directly from savers to investors.	It promotes capital formation indirectly.
Pricing	Prices are determined and decided by the management ofjthe company	Prices are determined by demand and supply for the security.

Question 43.
Explain the trading procedure on a stock exchange. (Comportment 2014)
Answer:
The procedure for purchase of and sale of securities in a stock exchange involves the following steps:
(i) Selection of a broker The first step is to select a broker, who will buy/sell securities on behalf of the investor/speculator. Brokers may be individuals, partnership firms or corporate bodies. Selection of broker is compulsory as trading can only be done by SEBI registered brokers, who are members of a stock exchange.

(ii) Opening of a demat account with depository Dematerialised (Demat) account refers to an account which an individual must open with the depository participant (banks, stock brokers) to trade in the listed securities in electronic form.

Depository is an institution/organisation which holds securities in electronic form, in which trading is to be done. At present there are two depositories in India:
(a) NSDL (National Securities Depository Ltd.) and
(b) CDSL (Central Depository Services Ltd.)
Depository Participant (DP) maintain your securities account balance and intimates the account status from time to time.

(iii) Placing the order The next step is to place the order with the broker, which can be done through telephone, cell phone, e-mail, etc.
Instruction regarding which securities and how many securities are to be bought or sold should be clearly given to the broker.

(iv) Executing the order According to the instructions, the broker executes the order and buys or sells the required securities. The broker then issues a contract note. A copy of contract note specifies the name and the price of securities, names of parties, brokerage charges, etc., which is signed by the broker.

(v) Settlement This is the last stage in the trading of securities done by brokers on behalf of their clients. The mode of settlement depends upon the nature of contract. Equity spot markets follow a T + 2 rolling settlement. This means a trade taking place on Monday gets settled by Wednesday. Trading times on stock exchange are between 9:55 am and 3:30 pm 1ST, from Monday to Friday. Each exchange has its own clearing house, which assumes all settlement risk.

Question 44.
What is meant by money market? Explain any two instruments used in money market. (Delhi 2011)
Answer:
Money market is a market for short-term funds which deals in monetary assets whose period of maturity is upto one year.

The two instruments used in money market are:
(i)’ Treasury Bills (T-bills) It is an instrument of short-term borrowing by the RBI on behalf of government of India, maturing in less than one year. They are also known as zero coupon bonds. They are issued in the form of promissory note.

They are highly liquid and provide assured yield. There is no risk of default. They are issued at a discount and repayable at par. They are available for a minimum amount of ₹ 25,000 and in multiples there of.

(ii) Commercial Paper (CP) A commercial paper is an unsecured instrument issued in the form of a promissory note. They are negotiable and transferable by endorsement and delivery. It is issued by large and credit worthy companies for reusing short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. It is sold at a discount and redeemed at par.

Question 45.
Explain the regulatory functions of SEBI. (All India 2010; Delhi 2010)
Answer:
Regulatory functions of SEBI are as follows:
(i) To regulate business in stock exchanges.
(ii) To register and regulate the working of intermediaries.
(iii) To register and regulate the working of mutual funds.
(iv) To conduct inquiries and audit of stock exchange.
(v) Regulation of taken-over bids by companies.

Question 46.
Explain the following money market instruments:
(i) Call money
(ii) Treasury bill
(iii) Commercial paper
(iv) Certificate of deposit (Delhi 2013)
Answer:
(i) Call money:
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 very volatile and changes even from hourtohour.

(ii) Treasury bill:
Treasury bill Also known as zero coupon bond, a T-BIU is issued by RBI on behalf of Central Government to meet its short-term reqùirement of funds. It is issued in the 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, 4,000 being the interest received by him.

(iii) Commercial paper:
It is issued as an unsecured promissory note by large and creditworthy companies for meeting their short-term needs of funds. It is a negotiable instrument, transferable by endorsement and delivery. This instrument is generally used for ‘bridge fmancing’, i.e. a method of financing used by companies to cover the floatation costs of issuing equity shares, preference shares, etc.

(iv) Certificate of deposit:
These are short-term. unsecured, negotiable instniments 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 mobibse large amounts of money for short periods.

Multiple Choice Questions

Question 1.
Treasury bills are issued by in India.
(a) RBI
(b) SBI
(c) SEBI
(d) Ministry of finance
Answer:
(a) RBI

Hint:
Treasury bill is a short-term borrowing instrument issued by RBI on the behalf of Indian Government.

Question 2.
In primary markets, first time issued shares to be publicly traded in stock markets is considered as
(a) traded offering
(b) public markets
(c) issuance offering
(d) initial public offering
Answer:
(d) initial public offering

Hint:
An Initial Public Offering (IPO), is the very first sale of stock issued by a company to the public.

Question 3.
Primary and secondary markets
(a) compete with each other
(b) complement each other
(c) function independently
(d) control each other
Answer:
(b) complement each other

Hint:
Once the securities are issued in the primary market, they are then traded in the secondary market. It is in this sense that both the markets complement each other.

Question 4.
If a comparison is to be made between the securities traded in money and capital markets, securities traded in capital market are
(a) less liquid and for more duration
(b) highly liquid and for shorter duration
(c) less liquid and for shorter duration
(d) highly liquid and for higher duration
Answer:
(a) less liquid and for more duration

Question 5.
Match the following.

List I	List II
I. Bull	(i) Buys and sells securities on his own behalf
II. Bear	(ii) Expects fall in prices of securities
III. Jobber	(iii) Buys securities of a new issue in the hope of selling them quickly at a higher price
IV. Stag	(iv) Expects rise in prices of securities

Codes

	I	II	III	IV
(a)	(i)	(ii)	(iii)	(iv)
(b)	(ii)	(i)	(iii)	(iii)
(c)	(iv)	(ii)	(i)	(iv)
(d)	(ii)	(iv)	(iii)	(i)

Answer:
(c) (iv) (ii) (i) (iii)

Question 6.
Example of used malpractices at stock exchanges is
(a) price rigging
(b) insider trading
(c) unofficial private placements
(d) All of these
Answer:
(d) All of these

Question 7.
‘An instrument is transferable by endorsement and delivery. It is sold at a discount and redeemed at par’. Identify the instrument.
(a) Commercial bill
(b) Commercial paper
(c) Certificate of deposits
(d) Call money
Answer:
(b) Commercial paper

Hint:
Commercial paper is a money market instrument. It is issued by large creditworthy companies to raise short-term funds at lower rates of interest than the market rate. It is sold at discount and redeemed at par.

Question 8.
Which of the following statements is not true?
(a) SEBI conducts research and publish useful information
(b) Primary market directly promotes capital formation
(c) Private placement involves high floatation costs
(d) None of the above
Answer:
(c) Private placement involves high floatation costs

Hint:
Private placement is beneficial to companies as it helps companies to raise funds quickly and save floatation costs. Therefore, private placement does not involves high floatation costs, but it saves floatation costs.

Question 9.
Mr X bought certain shares of Reliance Ltd from Mr Y and lodged them with the depository in form of a book entry. However, as per the register of members of Reliance Ltd, Mr Y is still the owner of those shares. In such a situation, Mr X would be known as
(a) registered owner
(b) holder of shares
(c) beneficial owner
(d) None of these
Answer:
(c) beneficial owner

Hint:
In this instant case, Mr Y is the registered owner of securities. However, Mr X is the real owner also known as beneficial owner of such securities, as he has bought those securities, from Mr Y and lodged them with the depository.

Question 10.
Suresh bought certain securities from a new issue of shares as he speculated that the price of the stock will rise immediately when the trading will start. His sole aim is to sell the shares soon after allotment and to earn quick profits. Operators like Mr Suresh are known as
(a) broker
(b) bulls
(c) bears
(d) stags
Answer:
(d) stags

Hint:
Stags are operators in stock exchanges, who are basically speculators. They aim at earning quick profits by subscribing shares at an IPO of companies. They buy shares prior to commencement of public trading.

Question 11.
If in a stock exchange, any trade taking place on Monday and gets settled by Wednesday, it comes under which rolling settlement?
(a) T+ 2
(b) T+ 3
(c) T + 4
(d) T + 5
Answer:
(a) T + 2

Hint:
T+2 is a description used to explain the settlement period of a trade. The date of the trade is referred to as (T) and (+2) refers to the number of settlement days following the trade date. Equity spot markets follow a T+2 rolling settlement, if any trade taking place on Monday gets settled by Wednesday.

Question 12.
Match the following with the most appropriate option.

List I	List II
I. Commercial papers	(i) assumes all settlement risks
II. Clearing houses	(ii) also called as bookrunner
III. SENSEX	(iii) unsecured promissory notes
IV. Lead manager of an e-IPO	(iv) reflects day-to-day fluctuations in share prices

Codes

	I	II	III	IV
(a)	(i)	(iv)	(ii)	(iii)
(b)	(iii)	(ii)	(iv)	(i)
(c)	(iii)	(i)	(iv)	(ii)
(d)	(iv)	(iii)	(ii)	(i)

Answer:
(c) (iii) (i) (iv) (ii)

Question 13.
Mr X has some securities which he has purchased from stock market. His friend asks him the proof of ownership of his securities. What kind of proof Mr X will have to show to his friend?
(a) Share certificate
(b) Warrant
(c) Deed
(d) Agreement
Answer:
(a) Share certificate