Financial Markets - Solutions

CBSE Class 12 Business Studies
NCERT Solutions
Chapter 10
Financial Market

Multiple Choice Type:

1. Primary and secondary markets

(a) Compete with each other

(b) Complement each other

(d) Control each other

Ans: (b) Primary and secondary markets complement each other. Primary market deals with the issue of new securities. That is, through the primary market a company raises capital directly from the borrowers. On the other hand, secondary market deals in the purchase and sale of the existing securities. That is, once the securities are issued in primary market, they are then traded in the secondary market. It is in this sense that both the markets complement each other.

2. The total number of Stock Exchange in India is

(a) 20

(b) 21

(d) 23

Ans: (d) The total number of Stock Exchange in India is 23. However, as per the latest updates by SEBI, there are 25 Stock Exchanges in India.

3. The settlement cycle in NSE is

(a) T+5

(b) T+3

(d) T+1

Ans: (c) Settlement cycle refers to the time period within which the actual settlement between the buyers and sellers of shares takes place. In other words, it refers to the time period within which the seller of the shares would receive the money and the buyers of the share would get the ownership of the share. NSE follows a T+2 settlement cycle. Here, T refers to the transaction date. Thus, T+2 implies that transactions in NSE are settled within 2 days of the transaction date.

4. The National Stock Exchange of India was recognized as stock exchange in the year

(a) 1992

(b) 1993

(d) 1995

Ans: (b) National Stock Exchange of India was promoted by financial institutions and established as a public limited company in 1992. However, it was 'recognized as a stock exchange' in April,'1993' under Securities Contracts (Regulation) Act,1956. It commenced its operations in capital market in 1994 and operations in derivatives market were started in 2000.

5. NSE commenced futures trading in the year

(a) 1999

(b) 2000

(d) 2002

Ans: (b) National Stock Exchange started its operations in the year 1994. It commenced 'trading in future' and options market on 12 June, '2000'.

6. Clearing and settlement operations of NSE are carried out by

(a) NSDL

(b) NSCCL

(d) CDSL

Ans: (b) The clearing and settlement operations of NSE are carried out by NSCCL. NSCCL (National Securities Clearing Corporation Ltd.) was incorporated in august, 1995 and it commenced its clearing operations for NSE in April 1996.

7. OTCEI was started on the lines of

(a) NASDAQ

(b) NYSE

(d) NSE

Ans: (a) OTCEI (Over the Counter Exchange of India) was incorporated in the year 1990 on the lines of NASDAQ which is the OTC in USA. OTCEI is a fully computerised and transparent stock exchange. It was established with the objective of addressing the needs of small companies and helps in maintaining the liquidity of their securities.

8. To be listed on OTCEI, the minimum capital requirement for a company is

(a) Rs. 5 crores

(b) Rs. 3 crores

(d) Rs. 1 crore

Ans: (b) To be listed on OTCEI, the minimum capital requirement for a company is Rs 3 crores and the maximum is Rs 50 crores.

9. A Treasury Bill is basically:

(a) An instrument to borrow short-term funds

(b) An instrument to borrow long-term funds

(d) None of the above

Ans: (a) A Treasury Bill is an instrument to borrow short term funds by the Government of India. They have a maturity period of less than a year. They are also called Zero-Coupon Bonds. They are issued by the RBI on behalf of the Central Government.

Short Answer Type:

1. What are the functions of a financial market?

Ans: A financial market refers to the market where the creation and exchange of financial assets such as shares and debentures takes place. The following are the functions of a financial market-

Financial markets create an open and regulated system for companies to obtain large amounts of financial capital to grow their businesses. This is done through the stock and bond markets. Markets also allow these businesses to offset risk with commodities and foreign exchange futures contracts, as well as other derivatives.

Since the markets are public, they provide an open and transparent way to set prices on everything traded. These prices assume that all available knowledge about everything traded is taken into consideration. This reduces the cost of getting information, because it's already incorporated into the price.

The sheer size of the financial markets provide liquidity. In other words, sellers can easily unload assets whenever they need to raise cash. The size also reduces the cost of doing business, since companies don't have to go far to find a buyer, or someone willing to sell.

2. ''Money Market is essentially a Market for short term funds''. Discuss.

Ans: Money market refers to the market for trading of short term securities and funds. Securities traded in the money market have a very short maturity period ranging from one day to one year. Such assets act as a close substitute for cash or money. Due to their short maturity period they are also known as 'Near Money instruments'. Money market instruments act as an important source of finance for working capital requirements. They enjoy a high degree of liquidity. DFHI discounts money market securities and offers a ready market for them. In addition, securities traded in the money market are safe and secure as the transactions are made in those instruments that are issued by financial institutions and those companies that are financially strong. Common instruments traded in the money market are treasury bills, commercial paper, call money, certificate of deposit, etc.

3. What is a Treasury Bill?

Ans: Treasury bills are issued by Reserve Bank of India on behalf of the government to get short term borrowing as these bills are sold to banks and general public. These bills are negotiable instruments and are freely transferable. These are issued at a discount. These are considered safest investment as these are issued by R.B.I. The maturity period of Treasury Bills varies from 14 to 364 days. They are also called Zero Coupon Bonds. They are issued at a price lower than their face value and repaid at par. These are available for minimum amount of 25000 and in multiples thereof.

4. Distinguish between Capital Market and Money Market.

Ans: The following points highlight the difference between Capital Market and Money Market.

BASIS FOR COMPARISON	MONEY MARKET	CAPITAL MARKET
Meaning	A segment of the financial market where lending and borrowing of short term securities are done.	A section of financial market where long term securities are issued and traded.
Nature of Market	Informal	Formal
Financial instruments	Treasury Bills, Commercial Papers, Certificate of Deposit, Trade Credit etc.	Shares, Debentures, Bonds, Retained Earnings, Asset Securitization, Euro Issues etc.
Institutions	Central bank, Commercial bank, non-financial institutions, bill brokers, acceptance houses, and so on.	Commercial banks, Stock exchange, non-banking institutions like insurance companies etc.
Risk Factor	Low	Comparatively High
Liquidity	High	Low
Purpose	To fulfill short term credit needs of the business.	To fulfill long term credit needs of the business.
Time Horizon	Within a year	More than a year
Merit	Increases liquidity of funds in the economy.	Mobilization of Savings in the economy.
Return on Investment	Less	Comparatively High

5. What are the functions of a Stock Exchange?

Ans: Stock Exchange refers to a market where buying and selling of the existing securities take place. The following are the main functions of a stock exchange.

(1) Providing Liquidity and Marketability to Existing Securities:

Stock exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis. Whenever required, an investor can invest his money through this market into securities and can reconvert this investment into cash. Availability of ready market for sale and purchase of securities increases their marketability and enhances liquidity.

(2) Pricing of Securities:

A stock exchange provides platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined.

(3) Safety of Transactions:

Stock exchanges are organised markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of stock exchange has to follow them and if any member is found violating them, his membership is cancelled.

For instance, if any broker working in stock exchange charges more commission than stipulated from any investor or misleads him in any other way, then the management committee of the stock exchange can fine the broker and even his membership can be cancelled.

(4) Contributes to Economic Growth:

A stock exchange provides liquidity to securities. This gives the investor a double benefit-first, the benefit of the change in the market price of securities can be taken advantage of, and secondly, in case of need for money they can be sold at the existing market price at any time.

These advantages provided by the share market encourage the people to invest their money in securities. In this way, people’s money gets invested in industries and economic development becomes possible.

(5) Spreading Equity Cult:

Share market collects every type of information (more particularly about their economic condition) in respect of the listed companies. Generally, this information is published or in case of need anybody can get it from the stock exchange free of any cost.

In this way, the stock exchange guides the investors by providing various types of information. Consequently, the number of shareholders in companies is increasing continuously. Thus, the stock exchanges are playing a vital role in ensuring wider share ownership.

(6) Providing Scope for Speculation:

When securities are purchased with a view to getting profit as a result of change in their market price, it is called speculation. It is allowed or permitted under the provisions of the relevant Act. It is accepted that in order to provide liquidity to securities, some scope for speculation must be allowed. The share market provides this facility.