Financial Marke - Test Papers

 CBSE Test Paper - 01

Chapter - 10 Financial Markets

  1. The market price of a share of an equity share is determined by ________.
    1. the stock exchange on which the share is listed
    2. the board of directors of the company
    3. the chairman of the company
    4. individuals buying and selling the stock
  2. Which of the following is not a part of the capital market?
    1. Stock Exchanges
    2. Financial Institutions
    3. Banks
    4. RBI
  3. Which of the following marketable securities is the obligation of a commercial bank?
    1. Call money
    2. T-bills
    3. Commercial bill
    4. Negotiable certificate of deposit
  4. 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 Foods 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 crores. To raise 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 floatation cost. ________ is the instrument that the company may issue for this purpose.
    1. Commercial paper
    2. Certificate of deposit
    3. Commercial bill
    4. Treasury bill
  5. Which of the following is a method of floatation?
    1. Private Placement
    2. All of these
    3. Offer for sale
    4. Offer through prospectus
  6. State whether each of the following statement is True or False:
    1. Controlling unfair trade practices is a regulatory function of SEBI.
    2. Capital market deals only with debt and other equity securities.
    3. In the stock exchanges, transactions take place between companies and their shareholders directly.
    4. Money market instruments are safe as compared to capital market instruments.
  7. Fill in the blanks with suitable words:
    1. Commercial bill is also known as a ________.
    2. Equity shares, preference shares, bonds and debentures are traded in ________ market.
    3. Discount finance house of India has been established for a specific objective of providing a ready market for ________ instruments.
    4. Treasury bill is also known as ________ bond.
  8. Match the following:
    (i) Primary Market(a) Under this intermediaries issue securities to selected clients such as UTI, LIC etc.
    (ii) Secondary Market(b) Under this company issues a prospectus to inform and attract the general public.
    (iii) Public issue through the prospectus(c) In this securities are transferred between investors only.
    (iv) Private Placement(d) In this securities are directly issued by the company.
  9. State the essential function of the primary market.
  10. 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.
  11. State the instrument by which unsecured, negotiable, short-term instrument in bearer form, issued by commercial banks and development financial institutions.
  12. 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 Rs4 crores in 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 Rs6 crores. Mukand earned a profit of Rs2 crores. He gave Rs1 crore to Vikas Mehra and kept Rs1 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.
  13. Harsh works as a manager in a software company. He opened a Demat account with a broking house in order to trade in securities with the money he received as his first performance bonus. Since then he has been very active in stock trading under the guidance of a stockbroker. However, when he was hospitalised for a few days this year, his wife received several calls from his stockbroker for permission to transact on Harsh's behalf. Though she told him to wait until her husband had recovered, the stockbroker went ahead and executed the transactions. When Harsh got home from the hospital, he discovered that the unauthorised transactions had led to a loss for him.
    Harsh complained to the broking house, but they claimed he had authorised the transactions. Keeping in view, the guidelines issued by the National Stock Exchange that he had read in the national newspaper Harsh demanded proof and threatened to file a complaint. Since the broking house had no evidence that the deals had been authorised they made good the loss that Harsh had incurred due to the transactions.
    In the context of the above case:
    1. What is a Demat account?
    2. Who is acting as the depository participant for Harsh?
    3. Name the document that is legally enforceable and helps to settle the claims between the investor and the broker.
  14. Explain any three objectives of Securities and Exchange Board of India (SEBI).
  15. The electronic book-entry form of holding and transferring securities has eliminated the problems of theft and forgery. Discuss the concept indicated in the given statement.
  16. Explain the trading procedure on a stock exchange.
  17. Raheja Softwares Ltd. is a well-known name in the market for the last ten years. Now, it wants to set up new projects for the expansion and modernisation of existing projects. For this purpose, it is opting for two different methods of floating new issues.
    Firstly, securities are sold to issuing houses or stockbrokers at an agreed price which they resell to the investing public.
    Secondly, one share is offered against five shares (which shareholders already possess) to the existing shareholders. This is a privilege given to them.
    1. In which type of capital market the above issue of securities is covered?
    2. Write the name of the methods used for issue of securities by Raheja Softwares Ltd.
    3. List any two investors in this market.
  18. Explain the concept of depository and name and explain two types of depositories in India?

CBSE Test Paper - 01
Chapter - 10 Financial Markets

Solution

  1. (a) the stock exchange on which the share is listed
    Explanation: the stock exchange on which the share is listed
  2. (d) RBI
    Explanation: The Reserve Bank of India is India's central banking institution, which controls the monetary policy of the Indian rupee. RBI is not a part of the capital market.
  3. (d) Negotiable certificate of deposit
    Explanation: Negotiable certificate of deposit
  4. (d) Treasury bill
    Explanation: Treasury bill
  5. (b) All of these
    Explanation: There are various methods of floating which are offered through the prospectus, offer for sale, private placement, rights issue, e-IPOs.
    1. False
    2. True
    3. False
    4. True
    1. Bill of exchange
    2. Capital
    3. Money market
    4. Zero-coupon
  8. (i) - (d), (ii) - (c), (iii) - (b), (iv) - (a).
  9. The key function of the primary market is to facilitate capital growth by enabling individuals to convert savings into investments. It facilitates companies to issue new stocks to raise money directly from households for business expansion or to meet financial obligations.
  10. The method through which the company decided to raise additional capital is termed as 'Offer for sale'.
  11. "Certificate of deposit " is the instrument by which unsecured, negotiable, short-term instrument in bearer form.
  12. The two functions performed by SEBI in the above case are as follows:
    1. SEBI controls insider trading and imposes a 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 Mehra."
    2. 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 ".
    1. A Demat account is an account used for holding securities in electronic form. Demat account functions like a bank account, where our bank balance is a mere entry in the bank passbook and we do not hold the cash physically. Securities too are held in an electronic form (dematerialised form), in a similar manner and debited or credited.
    2. The Broking house is acting as the depository participant for Harsh.
    3. A contract note is a legally enforceable document that helps to settle the claims between the investor and the broker.
  14. 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:
    1. To protect the rights of investors and ensuring safety to their investment.
    2. To regulate stock exchange and securities markets to promote their orderly functioning.
    3. 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.
    4. To prevent fraudulent and malpractices by balancing between self-regulation of business and its statutory regulations.
  15. Dematerialisation of securities
    Your investments in shares and debentures can be held in electronic or dematerialised form in a depository. The depository is an entity which holds securities (shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors.
    Dematerialisation is comparable to keeping your money in a bank account. In Demat form, your physical share certificates are replaced by electronic book entries; purchase of shares are reflected as credits in your Demat account and sales are reflected as debits.
  16. The procedure for purchase of and sale of securities in a stock exchange involves the following steps:
    1. Selection of a broker: The buying and selling of securities can only be done through SEBI registered brokers who are members of the Stock Exchange. The broker can be an individual, partnership firms or corporate bodies. So the first step is to select a broker who will buy/sell securities on behalf of the investor or speculator.
    2. Opening of a Demat account with depository: Dematerialised (Demat) account refers to an account which an individual must open with the depository participant (banks, stockbrokers) to trade the listed securities in electronic form. The 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:
      1. CDSL (Central Depository Services Ltd ) Depository Participant (DP) maintain your securities account balance and intimates the account status from time to time.
      2. NSDL (National Securities Depository Ltd ).
    3. Placing the order: After opening the Demat Account, the investor can place the order. The order can be placed to the broker either (DP) personally or through phone, email, etc. The investor must place the order very clearly specifying the range of price at which securities can be bought or sold. e.g. “Buy 100 equity shares of Reliance for not more than Rs 500 per share.”
    4. 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 the contract note specifies the name and the price of securities, names of parties, brokerage charges, etc, which is signed by the broker.
    5. 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 the 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 IST, from Monday to Friday. Each exchange has its own clearinghouse, which assumes all settlement risk.
    1. Primary market
    2. The first method is 'offer for sale' and the other one is 'Rights Issue'.
      Offer for Sale- In this method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stockbrokers. In this case, a company sells an entire lot of securities at an agreed price to the intermediaries who, in turn, resell them to the investing public at a higher price.
      Rights Issue- This is a privilege available to existing shareholders to subscribe to a new issue of shares. The shareholders are offered the right to buy new shares in proportion to the existing shares held by them.
    3. Banks and financial institutions.
  18. A depository in a simple term means a place where something is a deposit for storage and security, however in our capital market, this term has a lot of relevance, we define
    “Depository as an institution that works like the bank”
    Likewise, our bank holds investor fund, similarly, depository maintains an account for investors securities (share, debentures, mutual fund etc) hold by them in a dematerialized or an electronic form.
    Investor used to hold the securities in the form of a physical certificate which has their own disadvantages and to take control over the irregularities of the capital market for the protection of an investor`s interest, Depository system has been introduced in India where the securities could be handled in an electronic form by the process of dematerialization.
    Depositories in India:
    We have 2 depositories in India which are well known as NSDL (National securities depository limited) and CSDL (Central Depository Services (India) Limited). They interface with the investors through their agents called Depository Participants (DPs). DPS could be the banks (private, public and foreign), financial institutions and Sebi-registered trading members.