Chapter 10 Financial Market Solutions
Question - 1 : - What is a Treasury Bill?
Answer - 1 : - Treasury bills are instruments that are used by government for raising money from financial market. It is issued as a promissory note with discount. The purpose of treasury bills is to fulfill the short-term money requirement of government. It has a maximum maturity period of 364 days. It is one type of money market instrument.
Question - 2 : - Explain the various segments of the NSE.
Answer - 2 : -
The various segments of NSE are:
1. Capital Market Segment: This is the segment in which NSE deals with equity shares, debentures, preference shares and ETF’s etc. Capital market provides a transparent and efficient platform for conducting trading in proper and fair way. It started in November 1995.
2. Wholesale Debt Market: This provides a platform for trading of debt securities or fixed income. This was operational from June 1994. Two parties are present in the debt market which are participants and the trading members. Trading members are brokers who are recognized by the NSE and participants are those who are looking for buying and selling securities.
Question - 3 : - State any two reasons why investing public can expect a safe and fair deal in the stock market. (Point w.r.t safety of Transactions – Functions of the Stock Exchange).
Answer - 3 : -
Investing public can expect safe and fair deal in stock market due to these two reasons:
i. The function of the stock exchange is to protect the rights and interests of the investors. It should be guiding individual investors and educating them on the ways to deal in stock exchange.
ii. The function is to develop fair practices and codes of conduct by the intermediaries involved like merchant bankers, brokers.
Question - 4 : - What is the common name for Beneficiary Owner Account, which is to be opened by the investors for trading in securities?
Answer - 4 : - Beneficial owner is the type of person who enjoys the ownership benefits even when the property title is in name of someone else. In other words, any individual or individuals who have the power to vote or influence any transaction decisions such as company shares either directly or indirectly.
Question - 5 : - Name any two details that need to be provided by the investor to the broker while filling a client registration form
Answer - 5 : -
The investor needs to provide following details to the broker at the time of filling a client registration form
i. Date of birth and address
ii. PAN Number
Question - 6 : - What are the functions of a financial market?
Answer - 6 : -
The functions of a financial market are as follows:
1. Financial markets acts as sources of savings for people which is profitable. The money will be utilized for some other purpose as one person’s saving will become the capital of another. Money can multiply as it is being invested without being kept idle.
2. It is helpful in determining the price of securities with the forces of demand and supply. It helps investors to get proper price for the savings and investment by them.
3. It provides the liquidity in financial markets to the buyers and sellers of the securities. Investors can safely invest their money and convert the investment to money whenever it is deemed necessary or as per the requirements of the investor.
4. Financial markets make it easier for people to invest without the need of spending time and money. All the necessary information required for buying and selling of securities are present in the financial market so there is no requirement to spend money for gaining knowledge which reduces the transaction cost.
Question - 7 : - “Money Market is essentially a Market for short term funds.” Discuss.
Answer - 7 : -
Money market is a market for funds that are short term in nature. The term of borrowing and lending in the money market or the maturity period is variable, it can range from one day to a year. Money market instruments act as important sources of working capital requirements for the business. These instruments are highly liquid in nature. The common types of money market instruments are treasury bills, commercial paper etc.
The features of Money market can be discussed as follows:
1. Due to large volume of transaction in the money market it is also known as wholesale market.
2. The participants of the money market are various financial entities such as investment institutions, mutual funds, public and private sector banks.
3. There is impersonal relationship between the participants in a money market.
Question - 8 : - Distinguish between Capital Market and Money Market.
Answer - 8 : -
| Basis of Comparison | Capital Market | Money Market |
| Time Span | Capital market is one part of the financial market in which borrowing and lending is of medium and long term. (more than a year) | Money market is that part of financial market where borrowing and lending is of short term or up to one year |
| Liquidity | Capital market instruments are less liquid | Money market instruments are highly liquid. |
| Returns Expected | Higher returns as investment is for longer duration | Low returns as investment is of short duration |
| Instruments | Capital market deals in instruments such as debentures, shares, preference shares and bonds etc. | Money markets deal in instruments such as bills of exchange, T-bill, promissory notes and call money etc. |
| Risk | As the instruments are less liquid in nature and long maturity | Money market securities are less risky due to short time period and sound financial position of the issuers. |
Question - 9 : - What are the functions of a Stock Exchange?
Answer - 9 : -
The functions of a stock exchange are as follows:
1. It provides a platform for trading of securities. A stock exchange offers easy conversion of securities to cash and also conversion of securities
2. It helps in establishing price for the assets of monetary nature which are traded. It is a common place for buyer and seller interactions and prices of securities are determined based on supply and demand.
3. There is safety and regulations in a stock market. Trade is conducted within a defined legal framework which ensures fairness in transactions.
4. In a stock market there is continuous buying and selling of stocks which helps in enhancing capital formation and supports economic growth.
5. As share prices keep changing, it indicates the corresponding changes in economic conditions, an economic recession will see share prices fall while a boom in the market will contribute to price increase.
Question - 10 : - What are the objectives of the SEBI?
Answer - 10 : -
The objectives of Securities and Exchange Board of India are as follows:
1. To regulate the stock exchange and securities market functioning. It looks to provide a secure place for raising funds by the issuer of securities.
2. It works on providing the investors with the guidelines which is related to investment. SEBI helps with reliable and adequate information about companies which helps companies in proper investment decisions.
3. To prevent malpractices that happen in securities trading. These malpractices included insider trading, non-adherence to companies act, violating rules and regulations etc. SEBI aims at preventing such malpractices so as to maintain investor trust.
4. To develop a code of conduct which involves all intermediaries such as merchant bankers, underwriters, brokers etc. SEBI provides a competitive and professional environment for all the intermediaries so that all transactions can be conducted by following fair practice.