12th SP Chapter 11 Solution Financial Market Maharashtra Board
12th SP Chapter 11 Solution
Chapter 11 – Financial Market
Q.1 A) Select the correct answer from the options given below and rewrite the statements.
1) A financial market is a market in which people trade _____ and derivatives at low transaction costs.
a) Gold
b) Financial securities
c) Commodities
2) When the trade bills are accepted by commercial banks it is known as _____.
a) Treasury bills
b) Commercial bills
c) Commercial papers
3) Money market is a market for lending and borrowing of funds for _____ term.
a) short
b) medium
c) long
4) Central Government is a borrower in the money market through the issue of _____.
a) Commercial Papers
b) Trade Bills
c) Treasury Bills
5) _____ is the market for borrowing and lending long-term capital required b business enterprises.
a) Money Market
b) Capital Market
c) Gold Market
Q.1 B) Match the pairs.
Answers.
a. 5) Trading of financial securities
b. 4) Short-term fund
c. 2) New issue market
d. 7) Unsecured promissory note
Q.1 C) Write a word or a term or a phrase that can substitute each of the following statements.
1) A market where people trade financial securities and derivatives at low transaction costs.
Ans: Financial Market
2) A market that provides long-term funds.
Ans: Capital Market
3) A market which provides short-term funds.
Ans: Money Market
4) A money market instrument used by banks when one bank faces a temporary shortage of cash.
Ans: Call Money/Notice Money
5) A bill which is issued by Reserve Bank of India on behalf of the Government of India.
Ans: Treasury Bill
6) A market which exclusively deals with the new issue of securities.
Ans: Primary Market/New Issue Market
Q.1 D) State whether the following statements are true or false.
1) A Financial Market is a market in which people trade financial securities and derivatives at high transaction costs.
Ans: False
2) Money market is the market for long-term funds.
Ans: False
3) Capital market is the market for long-term funds.
Ans: True
4) Primary market is also known as new issue market.
Ans: True
5) Secondary market is commonly known as stock market.
Ans: True
6) Commercial paper is a secured promissory note.
Ans: False
7) Treasury bills are issued by commercial banks.
Ans: False
Q.1 E) Find the odd one.
Treasury Bills, Shares, Certificate of Deposit.
FPO, Private Placement, Commercial paper.
New Issues Market, Call Money Market, Secondary Market.
Q.1 F) Complete the sentences.
1) Funds borrowed and lent in money market are for short term.
2) When trade bills are accepted by commercial banks, it is known as Commercial Bills.
3) Unsecured negotiable promissory notes issued by a commercial bank is called as Certificate of Deposits.
4) New shares, debentures, etc. are traded in Primary/New Issue market.
5) In capital market the instruments traded have maturity period of more than one year.
Q.1 G) Select the correct option from the bracket.
I)
Select the correct option from the bracket.
(Buying and selling of existing securities, Treasury Bills, Funds for long term, Fund for short term)
Answer:
Q.1 H) Answer in one sentence.
1) What is financial market?
Answer: A Financial Market is a market where Financial assets i.e. Financial instruments are exchanged or bought and sold.
2) What is call money market?
Answer: Call money and Notice money market is an important segment of the money market in India. Under Call money, funds are lent or borrowed for very short periods.
3) What is Certificate of Deposits?
Answer: These are unsecured negotiable promissory notes usually issued by Commercial Banks and Financial Institutions.
4) What is Trade Bill?
Answer: Bill of Exchange also called as Trade bills are negotiable instruments or bills drawn by a seller on the buyer for value of goods sold under credit sales.
5) What is new issue market?
Answer: In Primary market/New Issue market, companies sell their shares, Debentures, etc. for the first time to raise fresh capital.
Q.1 I) Correct the underlined word/s and rewrite the following sentences.
1) In Primary market, already existing securities are traded.
Answer: Secondary
2) Companies sell fresh shares for the first time to the public in secondary market.
Answer: Primary market
3) In Money market, the instruments traded have maturity period of more than one year.
Answer: Capital
4) Financial market can be classified as capital market and call money market.
Answer: Money
Q.2 Explain the following terms / concepts.
1) Financial market
Answer: a) A Financial Market is a market where Financial assets i.e. Financial instruments are exchanged or bought and sold.
b) Financial market helps in the mobilization of savings and convert them into investments.
c) Thus financial market acts as an intermediary between investors and borrowers.
d) Financial instruments are documents in the form of legal agreement between two parties having a monetary value.
2) Capital market
Answer: a) It is the market for borrowing and lending long-term capital required by business enterprises.
b) The financial assets dealt with in the capital market have long or indefinite maturity periods.
c) The capital market is a core of a country's financial system as it helps in mobilization of resources.
d) One of the important functions of the capital market is to provide ease of transactions for both the investors and companies.
3) Money market
Answer: a) Money market is a market for lending and borrowing of funds for short term.
b) It is a market wherein lending and borrowing of funds take place for a short period of time which varies from one day to a year.
c) The financial instruments traded in this market can be converted into cash easily without any loss of time and value.
d) The instrument like commercial paper, liquid and treasury bills, etc. are traded in the money market.
4) Call money market
Answer: a) Call money and Notice money market is an important segment of the money market in India.
b) Under Call money, funds are lent or borrowed for very short periods i.e. one day.
c) Funds have to be repaid within a specified time on the receipt of the notice given by the lender.
d) When one bank faces temporary shortage of cash, then another bank with surplus cash lends money to it.
5) Treasury bills
Answer: a) Treasury Bills are short-term securities issued by the Reserve Bank of India on behalf of the Central Government of India to meet the government’s short-term funds requirement.
b) Treasury Bills have three maturity periods – 91 days, 182 days and 364 days.
c) These bills are sold to banks and individuals, firms, institutions, etc.
d) These bills are negotiable instruments and are freely transferable.
6) Commercial bills
Answer: a) Bill of Exchange also called as Trade bills are negotiable instruments or bills drawn by a seller on the buyer for value of goods sold under credit sales.
b) These have short-term maturit period generall of 90 days and can be easily transferred.
c) If the seller wants immediate cash, he can discount the trade bills with Commercial banks i.e. sell it to banks for cash.
d) When the trade bills are accepted by Commercial banks it is known as Commercial Bills.
7) Repurchase agreement
Answer: a) Repo is an agreement where the seller of a security, (i.e. one who needs money) agrees to buy it back from the lender at a higher price on a future date.
b) Usually this agreement is made between RBI and commercial banks.
c) Repo rate is the rate at which banks borrow from RBI and Reverse repo rate is the rate at which RBI borrows from banks.
d) RBI uses the repurchase agreement to control the money supply in the economy.
8) Primary market
Answer: a) In Primary market, companies sell their shares, Debentures, etc. for the first time to raise fresh capital.
b) It exclusively deals with the issue of new securities, i.e. securities that are issued to investors for the very first time.
c) Hence this market is also known as New Issues Market.
d) The main function of the primary market is to facilitate capital formation.
9) Secondary market
Answer: a) Secondary market is more commonly known as the stock market or the stock exchange.
b) Here the previously issued securities are bought and sold by the investors.
c) After IPO, when the shares are listed at the Stock Exchange, they can be traded in the secondary market.
d) In this market the securities are traded between investors.
Q.3 Study the following case/situation and express your opinion.
1) Joy ltd. Company is a newly incorporated company. It wants to raise capital for the first time by issuing equity shares.
a) Should it go to the primary market or secondary market to issue its shares?
Answer: Joy ltd. Should go to primary market to issue its shares as they issuing it for the first time.
b) Should it offer its shares through a public offer or rights issue?
Answer: Joy ltd. Should offer it share through a public offer to raise capital.
c) What will be the issue of Equity shares by Joy Ltd.Co. called as IPO or FPO
Answer: The issue of Equity shares by Joy Ltd.Co. called as Initial Public Offer (IPO).
2) Mr. X is the CFO ( Chief Financial Officer ) of PQR Co. Ltd. which is a reputed company in the field of the construction business. Often Mr. X has to decide on investing surplus funds of the company for short durations. And at times, he also has to decide the sources from where he can raise funds for short durations.
a) Assume on behalf of the company Mr. X has Rs. 5 lakhs and wants to invest for a short period. Should he buy Equity shares or Certificate of Deposit?
Answer: On behalf of the company MR. X should buy a Certificate of Deposit to invest Rs 5 Lakhs for short period.
b) The company has surplus funds and wants to invest it. However, he needs the money back in 4 months, so should he invest in Treasury Bills or Government Securities?
Answer: On behalf of the company MR. X should invest surplus funds in treasury bills for a short period of 4 months.
c) Can the company issue Certificate of Deposit?
Answer: No, the PQR Co ltd cannot issue a Certificate of Deposit. These are unsecured negotiable promissory notes usually issued by Commercial Banks and Financial Institutions.
Q.4 Distinguish between the following.
1) Primary market and Secondary market.
2) Money market and Capital market.
Q.5 Answer in brief.
1) State any four functions of financial market.
Answer: A Financial Market is a market where Financial assets i.e. Financial instruments are exchanged or bought and sold.
Functions of Financial Market
1) Transfer of Resources: Financial Market facilitate the transfer of real economic resources from lenders to ultimate users.
2) Productive usage: Financial Market allows productive use of the funds. In the hands of the investors, their excess funds would have remained idle. Borrowers use these Funds for productive purposes.
3) Enhancing Income: Financial Market allows lenders to earn interest or dividend on their surplus funds, thus leading to the enhancement of the individual and the national income.
4) Capital Formation: Financial Market provides a channel through which savings flow to industrial and commercial organizations in the form of capital. This leads to capital formation.
5) Price determination: The financial instruments traded in a financial market get their prices from the mechanism of demand and supply. The investors are the suppliers of the funds and the corporates are the users. The interaction between the two and other market factors will help to determine the prices.
6) Sale Mechanism: Financial Market provides a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.
7) Mobilizing Funds: Idle funds in the hands of the investors can be productively used by corporates. Investors that have savings must be linked with corporates that require investment. So financial market enables investors to invest their savings according to their choices and risk assessment. This will utilize idle funds and the economy will boom.
8) Liquidity: Financial market provides a mechanism for liquidating financial instruments. This means at any given time, the investor can sell their financial instruments and convert them into cash. This is an important factor for investors who do not want to invest for a long period.
9) Easy access: Both investors and industries need each other. The financial market provides a platform where both the buyers and sellers can find each other easily.
10) Industrial development: Financial market helps in transforming savings into capital. Corporates use the funds of investors to undertake productive or commercial activities thereby leading to economic development.
2) State any four features of money market.
Answer: The money market is a market for lending and borrowing of funds for short term. It is a market wherein lending and borrowing of funds take place for a short period of time which varies from one day to a year.
Features of Money Market
1) The funds borrowed and lent in money market are for short term. The maximum period for which the funds are traded in the market is one year.
2) It is a wholesale market for short-term debt as the transaction volume is large.
3) Trading may take place over the telephone, after which written confirmation is done by way of e-mails.
4) Participants of money market include RBI, commercial banks, mutual funds, financial institutions, primary dealers, and corporates.
5) There is an impersonal relationship between the participants of the money market.
6) Mone market has no geographical area i.e. there is no fixed place for carrying out transactions.
7) The instruments of money market can be converted easily into cash or have very short maturity periods. Moreover, the returns on investment is also low.
3) State any four features of capital market.
Answer: It is the market for borrowing and lending long-term capital required by business enterprises. The financial assets dealt with in the capital market have long or indefinite maturity period.
Features of Capital Market
1) Link between investors and borrowers: The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.
2) Deals in medium and Long-term investment: A capital market is a market where medium and long-term financial instruments are traded. Through this market, corporates, industrial organizations, and financial institutions access long-term funds from both domestic and foreign markets.
3) Presence of Intermediaries: The capital market operates with the help of intermediaries like brokers, underwriters, merchant bankers, collection bankers, etc. These intermediaries are important elements of a capital market.
4) Promotes capital formation: Capital market provides a platform for investors and borrowers of long-term funds to trade. This leads to capital formation in an economy as it mobilizes funds.
5) Regulated by government rules, regulations, and policies: The capital market operates freely. However, it is regulated by government rules, regulations and policies. e.g. SEBI is the regulator of Capital markets.
6) Deals in marketable and non-marketable securities: Capital market trades in both marketable and non-marketable securities. Marketable securities are securities that can be transferred. e.g. Shares, Debentures etc. and non-marketable securities are those which cannot be transferred. e.g. Term Deposits, Loans, and Advances.
7) Variety of Investors: The capital market has a wide variety of investors. It comprises both individuals like general public and institutional investors like Mutual Funds, Insurance companies, Financial Institutions, etc.
8) Risk: Risk is very high here as the instruments have long maturity periods. However, the return on investments is very high.
4) Explain any 4 types of money market instruments.
Answer: In the money market, only those financial instruments are traded which are an immediate substitute for money. Some of these instruments are explained as follows :
1) Call money and Notice money: Call money and Notice money market is an important segment of the money market in India. Under Call money, funds are lent or borrowed for very short periods i.e. one day. Under Notice money, funds are lent or borrowed for periods between 2 days to 14 days. Funds have to be repaid within a specified time on the receipt of the notice given by the lender. When one bank faces a temporary shortage of cash, then another bank with surplus cash lends money to it. Hence Call/ Notice money market is also called as interbank Call money market.
2) Treasury Bills (T-Bills): Treasury Bills are short-term securities issued by the Reserve Bank of India on behalf of the Central Government of India to meet the government’s short-term funds requirement. Treasury Bills have three maturity periods – 91 days, 182 days, and 364 days. These bills are sold to banks and individuals, firms, institutions, etc. These bills are negotiable instruments and are freely transferable.
3) Trade Bills/Commercial Bills: Bill of Exchange also called as Trade bills are negotiable instruments or bills drawn by a seller on the buyer for value of goods sold under credit sales. These have a short-term maturity period generally of 90 days and can be easily transferred. If the seller wants immediate cash, he can discount
the trade bills with Commercial banks i.e. sell them to banks for cash. When the trade bills are accepted by Commercial banks it is known as Commercial Bills. Banks can rediscount the bills any number of times till the maturity of the bill.
4) Commercial Papers (CPs): Commercial Paper is an unsecured promissory note issued by highly rated companies, All India Financial Institutions, like SIDBI, Exim Bank, etc., and Primary Dealers with a fixed maturity period which varies from 7 days to maximum of 1 year. The minimum value of CP is Rs 5 lakhs or in Multiples of Rs 5 lakhs. It is issued at a discount to the face value and is highly liquid as it gives better returns than normal bank deposits. Individuals, Banks, Mutual funds, Companies, etc. invest in Commercial Papers.
Q.6 Justify the following statements.
1. Financial markets acts as link between investor and borrower.
Answer:
a) Financial Market is a market where Financial assets i.e. Financial instruments are exchanged or bought and sold.
b) In an economy individuals, corporates, governments, etc. may have excess funds and may want to invest it. They are called investors.
c) On the other hand there may be businessmen, corporates, Governments, etc. who may need funds and are called as Borrowers.
d) The investors lend money to the Borrowers through a market called as Financial Market.
e) Financial market helps in the mobilization of savings and converts them into investments.
f) Thus financial market acts as an intermediary between investors and borrowers.
2. Money market makes available short-term finance through different instruments.
Answer:
a) Money market is a market for lending and borrowing of funds for short term.
b) It is a market wherein lending and borrowing of funds take place for a short period of time which varies from one day to a year.
c) Also the financial instruments traded in this market can be converted into cash easily without any loss of time and value.
d) It is an important part of the financial system that helps in fulfilling the short-term and very short-term requirements of the companies, banks, financial institutions, government agencies, etc.
e) It is a market for financial assets which are close substitutes for money. An instrument like commercial paper, liquid and treasury bills, etc. are traded in the money market.
f) Hence, the Money market makes available short-term finance through different instruments.
3. Capital market is useful for corporate sector.
Answer:
a) Capital market is the market for borrowing and lending long-term capital required by business enterprises.
b) The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.
c) Through this market, corporates, industrial organizations, and financial institutions access long-term funds from both domestic and foreign markets.
d) Primary or New Issues Market- here companies sell fresh shares, debentures, etc. for the first time to the public.
e) Secondary Market – here already existing shares, debentures, etc. are traded through the Stock Exchanges.
f) Hence, Capital market is useful for corporate sector.
4. There are many participants in the money market.
Answer:
a) Money market is a market for lending and borrowing of funds for short term. It is a market wherein lending and borrowing of funds take place for a short period of time which varies from one day to a year.
Some Important Participants in Money Market:
b) Reserve Bank of India: It is the most important participant in the money market. Through the money market, RBI regulates the money supply and implements its monetary policy.
c) Central and State Government: Central Government is a borrower in the Money Market, through the issue of Treasury Bills (T-Bills).
d) Public Sector Undertakings (PSU): Many listed government companies can issue commercial paper in order to obtain its working capital.
e) Scheduled Commercial Banks: Scheduled commercial banks are very big borrowers and lenders in the money market.
e) Hence, There are many participants in money market.
Q.7 Answer the following
1) Explain the functions of the financial market.
Answer:
A Financial Market is a market where Financial assets i.e. Financial instruments are exchanged or bought and sold. Financial market helps in mobilization of savings and convert it into investments. Thus financial market acts as an intermediary between investors and borrowers. Financial instruments are documents in the form of a legal agreements between two parties having a monetary value.
Functions of Financial Market
1) Transfer of Resources: Financial Market facilitates the transfer of real economic resources from lenders to ultimate users.
2) Productive usage: Financial Market allows productive use of the funds. In the hands of the investors, their excess funds would have remained idle. Borrowers use these Funds for productive purposes.
3) Enhancing Income: Financial Market allows lenders to earn interest or dividend on their surplus funds, thus leading to the enhancement of the individual and the national income.
4) Capital Formation: Financial Market provides a channel through which savings flow to industrial and commercial organizations in the form of capital. This leads to capital formation.
5) Price determination: The financial instruments traded in a financial market get their prices from the mechanism of demand and supply. The investors are the suppliers of the funds and the corporates are the users. The interaction between the two and other market factors will help to determine the prices.
6) Sale Mechanism: Financial Market provides a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.
7) Mobilizing Funds: Idle funds in the hands of the investors can be productively used by corporates. Investors that have savings must be linked with corporates that require investment. So financial market enables investors to invest their savings according to their choices and risk assessment. This will utilize idle funds and the economy will boom.
8) Liquidity: Financial market provides a mechanism for liquidating financial instruments. This means at any given time, the investor can sell their financial instruments and convert them into cash. This is an important factor for investors who do not want to invest for a long period.
9) Easy access: Both investors and industries need each other. The financial market provides a platform where both the buyers and sellers can find each other easily.
10) Industrial development: Financial market helps in transforming savings into capital. Corporates use the funds of investors to undertake productive or commercial activities thereby leading to economic development.
2) State the instruments in the money market.
Answer:
The money market is a market for lending and borrowing funds for short term. It is a market wherein lending and borrowing of funds take place for a short period of time which varies from one day to a year. The financial instruments traded in this market can be converted into cash easily without any loss of time and value. Instrument like commercial paper, liquid and treasury bills, etc. are traded in the money market.
Instruments of Money Market:
1) Call money and Notice money: Call money and Notice money market is an important segment of the money market in India. Under Call money, funds are lent or borrowed for very short periods i.e. one day. Under Notice money, funds are lent or borrowed for periods between 2 days to 14 days. Funds have to be repaid within a specified time on the receipt of notice given by the lender. When one bank faces temporary shortage of cash, then another bank with surplus cash lends money to it. Hence Call/ Notice money market is also called as interbank Call money market.
2) Treasury Bills (T-Bills): Treasury Bills are short-term securities issued by the Reserve Bank of India on behalf of the Central Government of India to meet the government’s short-term funds requirement. Treasury Bills have three maturity periods – 91 days, 182 days, and 364 days. These bills are sold to banks and individuals, firms, institutions, etc. These bills are negotiable instruments and are freely transferable.
3) Trade Bills/Commercial Bills: Bill of Exchange also called as Trade bills are negotiable instruments or bills drawn by a seller on the buyer for value of goods sold under credit sales. These have short-term maturity period generally of 90 days and can be easily transferred. If the seller wants immediate cash, he can discount the trade bills with Commercial banks i.e. sell them to banks for cash. When the trade bills are accepted by Commercial banks it is known as Commercial Bills. Banks can rediscount the bills any number of times till the maturity of the bill.
4) Commercial Papers (CPs): Commercial Paper is an unsecured promissory note issued by highly rated companies, All India Financial Institutions, like SIDBI, Exim Bank, etc., and Primary Dealers with a fixed maturity period which varies from 7 days to maximum of 1 year. The minimum value of CP is Rs 5 lakhs or in Multiples of Rs 5 lakhs. It is issued at a discount to the face value and are highly liquid as it gives better returns than normal bank deposits. Individuals, Banks, Mutual funds, Companies, etc. invest in Commercial Papers.
5) Certificate of Deposits (CDs): These are unsecured negotiable promissory notes usually issued by Commercial Banks and Financial Institutions. It is a receipt of funds deposited in a bank for a fixed period at a specified rate of interest. It can be issued for a minimum value of Rs 1 Lakh or in multiples of Rs 1 Lakh. They can be issued at a discount to the face value. They have a maturity period of a minimum of 7 days and a maximum of 1 year. (Maximum maturity maybe 3 years if the CDs are issued by Financial Institutions.) CDs can be bought by individuals, companies, etc.
6) Government Securities: The marketable debts issued by the government or by semi-government bodies which represent claims on the government is known as government securities. These securities are issued by agencies such as Central Government, State Government, local self-government e.g. Municipalities, etc. These securities are safe investments as payment of interest and repayment of principal amount are guaranteed
by the government.
7) Repo or Repurchase Agreement: Repo is an agreement where the seller of a security, (i.e. one who needs money) agrees to buy it back from the lender at a higher price on a future date. Usually, this agreement is made between RBI and commercial banks. Repo rate is the rate at which banks borrow from RBI and Reverse repo rate is the rate at which RBI borrows from banks. RBI uses the repurchase agreement to control the money supply in the economy. These agreements are the most liquid of all money market investments having maturity ranging from 24 hours to several months.
8) Money Market Mutual Funds (MMMFs): A Mutual Fund which invests in Money market instruments like Call Money, Repos, T-bills, CDs, etc. is called as MMMFs. This type of Mutual Fund invest in debt instruments that mature in less than 1 year and have low risk. Individuals and corporates are allowed to invest in MMMFs.
3) State the features of capital market.
Answer:
It is the market for borrowing and lending long term capital required by business enterprises. The financial assets dealt with in the capital market have long or indefinite maturity period. The capital market is a core of a country’s financial system as it helps in mobilization of resources. One of the important functions of the capital market is to provide ease of transactions for both the investors and companies.
Features of Capital Market
1) Link between investors and borrowers: The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.
2) Deals in medium and Long-term investment: A capital market is a market where medium and long-term financial instruments are traded. Through this market, corporates, industrial organizations, and financial institutions access long-term funds from both domestic and foreign markets.
3) Presence of Intermediaries: Capital market operates with the help of intermediaries like brokers, underwriters, merchant bankers, collection bankers etc. These intermediaries are important elements of a capital market.
4) Promotes capital formation: Capital market provides a platform for investors and borrowers of long term funds to trade. This leads to capital formation in an economy as it mobilizes funds.
5) Regulated by government rules, regulations, and policies: The capital market operates freely. However, it is regulated by government rules, regulations and policies. e.g. SEBI is the regulator of Capital markets.
6) Deals in marketable and non-marketable securities: Capital market trades in both marketable and non-marketable securities. Marketable securities are securities that can be transferred. e.g. Shares, Debentures, etc., and non-marketable securities are those which cannot be transferred. e.g. Term Deposits, Loans, and Advances.
7) Variety of Investors: The capital market has a wide variety of investors. It comprises both individuals like the general public and institutional investors like Mutual Funds, Insurance companies, Financial Institutions, etc.
8) Risk: Risk is very high here as the instruments have long maturity periods. However, the return on investments is very high.
