Chapter 11 Financial Market Solutions

Group ‘A’

Group ‘B’

(a) Financial Market

(5) Trading of financial securities

(b) Money Market

(4) Short term fund

(c) Primary Market

(2) New issue market

(d) Commercial paper

(7) Unsecured promissory note

(e) Capital Market

(1) Long term fund

1C. Write a word or term or a phrase that can substitute each of the following statements.

1D. State whether the following statements are True or False.

1E. Find the odd one.

1F. Complete the sentences.

1G. Select the correct option from the bracket.

Group ‘A’

Group ‘B’

(a) Money Market

(1) …………………..

(b) Zero risk instrument

(2) …………………..

(c) ………………….

(3) Capital Market

(d) …………………

(4) Secondary Market

Group ‘A’

Group ‘B’

(a) Money Market

(1) Fund for short term

(b) Zero risk instrument

(2) Treasury bills

(c) Fund for long terms

(3) Capital Market

(d) Buying and selling of existing securities

(4) Secondary Market

1H. Answer in one sentence.

1I. Correct the underlined word/s and rewrite the following sentences.

2. Explain the following terms/concepts.

Definition:
G.H. Peters defines, “Capital Market as being the market or collection of inter-related markets in which potential borrowers are brought into contact with potential lenders.”

Definition:
According to the Reserve Bank of India, “The money market is the center for dealings mainly of short-term characters in money assets; it needs the short-term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short-term surplus investible funds at the disposal of financial, institutions or individuals are bid by borrower’s agents comprising institutions and individuals and also by the government itself.”

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.

Question (a).
Should d go to primary market or secondary market to issue its shares?
Answer:
Joy Ltd. should go to the primary market to issue equity shares in the market. Primary Market is mainly dealing with fresh issues of securities.

Question (b).
Should it offer its shares through public offer or rights issue?
Answer:
Joy Ltd. should offer its shares through public offer (IPO) as Joy Ltd. Company is going to its securities first time.

Question (c).
What will be the issue of Equity shares by Joy Ltd. Company called IPO or FPO?
Answer:
When Joy Ltd. issued its securities first time then it is called as IPO at the same time if Joy Ltd. offered securities for the second, third, or fourth time it is called a follow on public offering (EPO)

2. Mr. X is the CFO (Chief Financial Officer) of PQR Co. Ltd. which is a reputed company in the field of 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.

Question (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 of Certificate of Deposit?
Answer:
As Mr. X wants to invest for a short period with the amount of Rs. 5 lakhs, then he should buy a certificate of deposit.

Question (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:
If he needs money back in 4 months, then he should invest in Treasury bills with the option of 91 days Maturity.

Question (c).
Can the company issue Certificate of Deposit?
Answer:
PQR Company Ltd. is a construction company. Hence it cannot issue a certificate of deposit as it can be issued by commercial banks and financial institutions only.

4. Distinguish between the following.

5. Answer in brief.

(ii) Transfer of Resources:

(iii) Mobilization of funds:

(iv) Price determination:

(ii) Involvement of Brokers:

(iii) Financial Assets:
The financial assets that are dealt in the money market are close substitutes for money as these assets can be easily converted into cash without any loss in value.

(iv) Organisations Involved:
The main organizations dealing in the money market in India are the Reserve Bank of India (RBI), State governments, banks, corporate investors, etc.

(ii) Commercial Bills:

(iii) Certificate of Deposits:

(iv) Treasury Bills:

6. Justify the following statements.

(ii) Central and State Government:
Central Government is a borrower in the Money Market, through the issue of Treasury Bills (T-Bills). The T-Bills are issued through the Reserve Bank of India (RBI). The T-Bills represent zero risk instruments. Due to its risk-free nature banks, corporate, etc. buy the T-Bills and lend to the government as a part of its short-term borrowing program. The state government issues bonds called State Development Loans.

(iii) Public Sector Undertakings (PSU):
Many listed government companies can issue commercial paper in order to obtain their working capital.

(iv) Scheduled Commercial Banks:
Scheduled commercial banks are very big borrowers and lenders in the money market. They borrow and lend in the call money market, short notice market, Repo and Reverse Repo market.

(v) Insurance Companies:
Both the general and life insurance companies are usual lenders in the money market. They invest more in capital market instruments. Their role in the money market is limited.

(vi) Mutual Funds:
Mutual Funds offer varieties of schemes for the different investment objectives of the public. Mutual funds schemes are liquid schemes. These schemes have the investment objective of investing in money market instruments.

(vii) Non-Banking Finance Companies (NBFCs): NBFCs use their surplus funds to invest in government securities, bonds, etc. (Example of NBFC – Unit Trust of India)

(viii) Corporates:
Corporates borrow by issuing commercial papers which are nothing but short-term promissory notes. They are the lender to the banks when they buy the certificate of deposit issued by the banks.

(ix) Primary Dealers:
Their main role is to promote transactions in government securities. They buy as well as underwrite the government securities.

7. Answer the following questions.

Functions of Financial Market:
(i) Capital formation:

(ii) Transfer of Resources:

(iii) Mobilization of funds:

(iv) Price determination:

(v) Productive usage:

(vi) Enhancing Income:

(vii) Liquidity:

(viii) Sale Mechanism:

(ix) Easy access:

(x) Industrial Development:
The financial market transforms saving into capital. Corporate use of funds of investors to undertakes productive or commercial activities leads to economic development.

Instruments of Money Market:
(i) Commercial Paper:

(ii) Commercial Bills:

(iii) Certificate of Deposits:

(iv) Treasury Bills:

(v) Government Securities:

(vi) Money Market Mutual Funds:

(vii) Repo Rate:

Features of Capital Market:
Following are the main features of the capital market:
(i) Link between investors and borrowers:
The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.

(ii) 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 corporate, industrial organizations, financial institutions access long-term funds from both, domestic and foreign markets.

(iii) 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.

(iv) Promotes capital formation:
The 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.

(v) Regulated by government rules, regulations, and policies:
The capital market operates freely. However, it is regulated by government rules, regulations, and policies.
For e.g. SEBI is the regulator of Capital markets.

(vi) Deals in marketable and non-marketable securities:
Capital market traders 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.

(vii) 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.

(viii) Risk:
Risk is very high here as the instruments have long maturity periods. However, the return on investments is very high.

(ix) Instruments in capital market:

(x) Types of Capital Market:
Capital market is mainly classified as-
(i) Government Securities Market or Gilt-edged markets:
In this market, government and semi-government securities are traded.

(ii) Industrial Securities Market:
In this market, industrial securities, i.e. shares and debentures of new or existing corporate are traded. This market is further divided into: