Chapter 11 -Financial Market.

11 Dec 2020 4:58 pm

Chapter 11, Financial Market, hsc, sp, secretarial practice, maharashtra board, full solution,

Select the correct answer from the options given below and rewrite the statement.

1.A financial market is a market in which people trade _____________ and derivatives at low transaction costs.

Options
  • Gold
  • Financial securities
  • Commodities

2.When the trade bills are accepted by commercial banks it is known as _________.

Options
  • Treasury bills
  • Commercial bills
  • Commercial papers

3.Money market is a market for lending and borrowing of funds for _________ term.

Options
  • short
  • medium
  • long

4.Central Government is a borrower in the money market through the issue of ____________.

Options
  • commercial papers
  • trade bills
  • treasury bills

5.____________ is the market for borrowing and lending long term capital required by business enterprises.

Options
  • Money Market
  • Capital Market
  • Gold Market

Match the pair.

Group ‘A’Group ‘B’
a) Financial market1) Long term fund
b) Money market2) New issue market
c) Primary market3) Trading of commodities
d) Commercial paper4) Short term fund
 5) Trading of financial securities
 6) Share market
 7) Unsecured promissory note
 8) Secured promissory note

SOLUTION

Group ‘A’Group ‘B’
a) Financial market5) Trading of financial securities
b) Money market4) Short term fund
c) Primary market2) New issue market
d) Commercial paper7) Unsecured promissory note

Write a word or a term or a phrase which can substitute the following statement.

1.A market where people trade financial securities and derivatives at low transaction cost

SOLUTION

A market where people trade financial securities and derivatives at low transaction cost-Financial market

2.A market which provides long term funds

One word Answer

SOLUTION

A market which provides long term funds – Capital market

3.A market which provides short term funds

SOLUTION

A market which provides short term funds-Money market

4.A money market instrument used by banks when one bank faces a temporary shortage of cash.

SOLUTION

A money market instrument used by bank when one bank faces a temporary shortage of cash-Call or notice money

5.A bill which is issued by Reserve Bank of India on behalf of the Government of India.

SOLUTION

A bill which is issued by Reserve Bank of India on behalf of theGovernment of India-Treasury bill

6. A market which exclusively deals with the new issue of securities

SOLUTION

A market which exclusively deals with the new issue of securities-Primary market/ New issue market

State whether the following statement is true or false

1.A Financial Market is a market in which people trade financial securities and derivatives at high transaction costs.

Options
  • True
  • False

2.Money market is the market for the long term funds

Options
  • True
  • False

3.Capital market is the market for the long term funds.

Options
  • True
  • False

4.Secondary market is commonly known as stock market.

Options
  • True
  • False

5.Commercial paper is a secured promissory note.

Options
  • True
  • False

6.Treasury bills are issued by commercial banks.

Options
  • True
  • False

1.Find the odd one.

Options
  • Treasury Bills
  • Shares
  • Certificate of Deposit.

2.Find the odd one.

Options
  • FPO
  • Private Placement
  • Commercial paper

3.Find the odd one.

Options
  • New Issues Market
  • Call Money Market
  • Secondary Market.

Complete the sentence.

1.Funds borrowed and lent in money market are for ___________ term.

SOLUTION

Funds borrowed and lent in money market are for short term.

2.When trade bills are accepted by commercial banks, it is known as _________.

SOLUTION

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 _______.

Fill in the Blank

SOLUTION

Unsecured negotiable promissory notes issued by a commercial bank is called as Certificate of Deposits (CDs)

4.New shares, debentures, etc. are traded in ____________ market.

SOLUTION

New shares, debentures, etc. are traded in primary/ new issues market.

5.In capital market the instruments traded have maturity period of more than ______ year.

SOLUTION

In capital market the instruments traded have maturity period of more than one year.

1.Select the correct option from the bracket.

Group ‘A’ Group ‘B’
a) Money market1) ____________
b) Zero risk instrument2) _____________
c) __________3) Capital market
d) __________4) Secondary market

(Buying and selling of existing securities, Treasury Bills, Funds for long term, Fund for short term)

SOLUTION

Group ‘A’ Group ‘B’
a) Money market1) Funds for short-term
b) Zero risk instrument2) Treasury Bills
c) Funds for long-term3) Capital market
d) Buying and selling of existing securities4) Secondary market

Answer in one sentence.

1.What is financial market

SOLUTION

It is a market where financial assets i.e. financial instruments are exchanged or bought and sold.

2.What is call money market?

SOLUTION

It is a market where funds are lent or borrowed for very short periods i.e. one day.

3.What is Certificate of Deposits?

SOLUTION

It is unsecured negotiable promissory note usually issued by commercial banks and financial institutions.

4.What is Trade Bill?

SOLUTION

It is a negotiable instrument or bill drawn by a seller on the buyer for value of goods sold under credit sales.

5.What is new issue market?

SOLUTION

New issue market or primary market exclusively deals with the issue of new securities to the public.

Correct the underlined word/s and rewrite the following sentence.

1.In Primary market, already existing securities are traded.

SOLUTION

In secondary market, already existing securities are traded.

2.Companies sell fresh shares for the first time to the public in secondary market.

SOLUTION

Companies sell fresh shares for the first time to the public in primary market.

3.In Money market, the instruments traded have maturity period of more than one year.

SOLUTION

In capital market, the instruments traded have maturity period of more than one year.

4.Financial market can be classified as capital market and call money market.

SOLUTION

Financial market can be classified as capital market and money market.

Explain the following term/concept.

1.Financial market

SOLUTION

It is a market where financial assets i.e. financial instruments are exchanged or bought and sold. It represents the market which raises finance for the long-term via Capital Market and for the short-term via Money Market. The financial market helps in mobilisation of savings and converts it into investments. Thus, the financial market acts as an intermediary between investors and borrowers.

2.Capital market

SOLUTION

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 a long or indefinite maturity period. In this market, the capital funds comprising both equity and debt are issued and traded. The capital market is the core of a country’s financial system as it helps in mobilisation of resources.

3.Money market

SOLUTION

The money market 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. The money market helps in fulfilling the short-term and very short-term requirements of the companies, banks, financial institutions, government agencies, etc.

4.Call money market

SOLUTION

It is a market where funds are lent or borrowed for very short periods i.e. one day. The call money market is an important segment of the money market in India. When one bank faces a temporary shortage of cash, then another bank with surplus cash lends money to it. Hence, it is also called as interbank call money market

5.Treasury bills

SOLUTION

Treasury Bills are short-term securities issued by RBI to meet the government’s short-term funds requirement. These bills are negotiable and freely transferable. They are sold to banks, individuals, firms, institutions, etc. The minimum value of T-bills is  25,000 or in multiples of  25000. These bills are also called Zero-Coupon Bonds. T-bills have three maturity periods – 91 days, 182 days, and 364 days.

6.Commercial bills

SOLUTION

These are the trade bills accepted by commercial banks. Trade bills are negotiable instruments or bills drawn by a seller on the buyer for the value of goods sold under credit sales. Banks can rediscount the bills any number of times till the maturity of the bill.

7.Repurchase agreement

SOLUTION

It is an agreement where the seller of 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 between RBI and commercial banks. RBI uses this 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.Primary market

SOLUTION

In the primary market, companies sell their shares, debentures, etc. for the first time to raise fresh capital. It exclusively deals with the issue of new securities and hence, also called the new issues market. The main function of the primary market is to facilitate capital formation. The primary market is classified as the equity market and debt market.

9.Secondary market

SOLUTION

The secondary market is more commonly known as the stock market or the stock exchange. Here, the previously issued securities are bought and sold by investors. There is no fresh issue. After IPO, when the shares are listed at the stock exchange, they can be traded in the secondary market.

1.Study the following case/situation and express your opinion.

Joy ltd. company is a newly incorporated company. It wants to raise capital for the first time by issuing equity shares.

  1. Should it go to the primary market or secondary market to issue its shares?
  2. Should it offer its shares through public offer or rights issue?
  3. What will be the issue of Equity shares by Joy Ltd. co. called as, IPO or FPO?

SOLUTION

  1. In primary markets, companies can raise capital for the first time from the public. So, Joy ltd. should go to the primary market to issue its shares since it is a newly incorporated company. 
  2. Joy ltd. wants to raise capital for the first time by issuing equity shares. Initial Public Offer (IPO) refers to the process of offering shares of a company to the public for the first time. Therefore, Joy ltd. should offer its shares through public offer.
  3. The issue of equity shares by Joy Ltd. Co. will be called as IPO which means Initial Public Offer.

2.Study the following case/situation and express your opinion.

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.

  1. 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?
  2. 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?
  3. Can the company issue Certificate of Deposit?

SOLUTION

  1. Mr. X wants to invest for a short period and money is in multiple of 1 lakh, so he should invest in a certificate of deposit. This is because the CD is issued for a minimum value of  1 lakh or in multiples of  1 lakh and provides maturity in minimum 7 days to maximum 1 year.
  2. Mr. X should invest surplus funds in government securities as these securities are safe investments. Alternatively, he can also invest in Treasury Bills having a maturity period of 91 days. However, the funds will not remain invested for the entire duration of 4 months in this case. Hence, investing in government securities seems more appropriate.
  3. No, PQR Co. Ltd. Cannot issue a Certificate of Deposit (CD). CDs are unsecured negotiable promissory notes, usually issued by commercial banks and financial institutions, but this company is a construction company.

Distinguish between the following.

1.Primary market and Secondary market.

SOLUTION

 Primary MarketSecondary Market
1) MeaningThe issue of new shares by the company is done in the primary market.The securities issued earlier are traded in the secondary market.
2) Mode of investmentThe securities are acquired directly from the company. It involves direct investment in securities.The securities are acquired from other stakeholders. It involves indirect investment in securities.
3) Parties in actionThe parties dealing in this market are companies and investors.The parties dealing in this market are only investors.
4) IntermediaryThe underwriters are the intermediaries.The security brokers are the intermediaries.
5) Value of securityThe price of a security in the primary market is fixed as it is decided by the company.The price of a security is fluctuating, depending on the demand and supply conditions in the market

2.Money market and Capital market

SOLUTION

 Money MarketCapital Market
1) MeaningIt is a component of the financial market where short-term borrowing and lending takes place.It is a component of the financial market where long-term borrowing and lending takes place.
2) Time PeriodIn the money market, the instruments traded have a maturity period of one year or less than one year.In the capital market, the instruments traded have a maturity period of more than one year
3) InstrumentsCertificate of deposits, repurchase agreements, commercial paper, treasury bills, etc. are the instruments traded in the money market.Stocks, shares, debentures, bonds, securities of the government are the instruments of the capital market.
4) Purpose of borrowingFunds are borrowed to meet working capital requirements or for small investments.Long-term funds help to establish a new business, expand or diversify it, or purchase fixed assets.
5) InstitutionsParticipants in the market are central banks, commercial banks, acceptance houses, non-bank financial institutions, bill brokers, etc.Stock exchanges, commercial banks, non-bank institutions, financial intermediaries, etc. are the participants in the market
6) RiskRisk factor is very less because the maturity period of the instruments is less than one yearRisk is more as compared to the money market as instruments have a long maturity period
7) Return on investmentReturn on investment is less as the money market is highly liquid and safe.Return on investment is comparatively high as the capital market is riskier
8) Role in the economyThis market increases liquidity of funds in the economy.This market helps in mobilisation of savings in the economy

Answer in brief.

1.State any four functions of financial market

SOLUTION

A financial market is a place where financial instruments or assets are exchanged or bought and sold. Financial markets help to mobilise savings and convert it into investments. They also attract funds from investors and channelize them to corporations.

The functions of the financial market are as follows:

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. Excess funds of the investors are used by the borrowers 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 individual and national income.

4) CAPITAL FORMATION: Capital formation is the net addition to the existing stock of an economy’s capital. The financial market provides a channel through which savings flow to industrial and commercial organisations in the form of capital. This leads to capital formation.

5) PRICE DETERMINATION: The financial instruments traded in the financial market get their prices from the mechanism of demand and supply. The interaction between the suppliers of the funds, i.e. investors and the users, i.e. corporates, as well as the other market factors helps 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) MOBILISING FUNDS: Investors having idle funds or savings must be linked with corporates that require investment. Thus, the financial market enables investors to invest their saving 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 the financial instruments, i.e., at any given time, the investor can sell these instruments and convert them into cash. It is an important factor for investors who do not want to invest for a long period.

2.State any four features of money market

SOLUTION

The money market is a market for lending and borrowing of funds for short-term which varies from one day to a year.

The features of the money market are as follows:

1) The funds borrowed and lent in the money market are for the 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 the 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) Money market has no geographical area i.e. there is no fixed place for carrying out transactions.

7) The instruments of the money market can be converted easily into cash or have very short maturity periods. Moreover, the returns on investment are also low.

8) Major segments of the money market are

i. Call money market

ii. Certificate of deposits market

iii. Treasury bill market

iv. Commercial bill market

v. Commercial papers market

3.State any four features of capital market

SOLUTION

It is the market for borrowing and lending long-term capital required by business enterprises. As per SEBI, the capital market is a market for long-term debt and equity shares.

The features of the capital market are as follows:

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: In the capital market, medium and long-term financial instruments are traded. Through this market, corporates, industrial organisations, financial institutions access long-term funds from both, domestic as well as foreign markets.

3) PRESENCE OF INTERMEDIARIES: Capital market operates with the help of intermediaries. The intermediaries like brokers, underwriters, merchant bankers, collection bankers, etc. play an important role in the capital market.

4) PROMOTES CAPITAL FORMATION: Capital market provides a platform for investors and borrowers of long-term funds to engage in trade. This leads to capital formation in the economy as it mobilises funds.

5) REGULATED BY GOVERNMENT RULES, REGULATIONS, AND POLICIES: 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: It trades in both, marketable and non-marketable securities. Marketable securities are securities that can be transferred. E.g.: shares, debentures, etc. Non-marketable securities are those which cannot be transferred. E.g.: term deposits, loans, and advances.

7) VARIETY OF INVESTORS: It has a wide variety of investors including both, individuals (i.e. general public) and institutional investors like mutual funds, insurance companies, financial institutions, etc.

8) RISK: Risk is very high as the instruments have long maturity periods. But along with that, the return on investments is also very high.

9) INSTRUMENTS: Equity shares, preference shares, debentures, bonds, government securities and public deposits are the main instruments in capital market.

10) TYPES: Capital market is mainly classified into two main types, government securities market or gilt-edged market and industrial securities market. Industrial securities market is further classified into the primary and secondary markets.

4.Explain any 4 types of money market instruments.

SOLUTION

In the money market, only those financial instruments are traded which are immediate substitutes 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 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. The minimum value of T-bills is  25,000 or in multiples of  25000. These are issued at a discount and repaid at par and hence they are also called Zero-Coupon Bonds.

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 the 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 it 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 a maximum 1 year. The minimum value of CP is 5 lakhs or in multiples of  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  1 lakh or in multiples of  1 lakh. They can be issued at a discount to the face value. They have a maturity period of minimum 7 days and maximum 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 are 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 investment 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 invests in debt instruments which mature in less than 1 year and have low risk. Individuals and corporates are allowed to invest in MMMFs.

Justify the following statement.

1.Financial markets acts as link between investor and borrower.

SOLUTION

  1. The financial market provides a platform where both, buyers and sellers can find each other easily.
  2. Investors who have savings are linked with entrepreneurial borrowers that require investment.
  3. As a result, the idle funds in the hands of investors can be productively used by corporates. 
  4. This market enables investors to invest their saving according to their choices and risk assessment.
  5. Hence, financial markets acts as link between investor and borrower.

2.Money market makes available short term finance through different instruments.

SOLUTION

  1. In the money market, lending and borrowing of funds take place for a short period of time, which may vary from one day to a year.
  2. Financial instruments in this market can be easily converted into cash without loss of time and value.
  3. In other words, money market deals with only those financial instruments which are immediate substitute for money.
  4. Some of the instruments used in the money market are call and notice money, treasury bills, trade/ commercial bills, commercial papers, certificates of deposits, government securities, repurchase agreements, Money Market Mutual Funds, etc.
  5. All these instruments have a maturity period of less than a year
  6. Hence, the money market makes available short-term finance through different instruments.

3.Capital market is useful for corporate sector.

SOLUTION

  1. Capital market is the market for borrowing and lending long-term capital required by business enterprises.
  2. The capital market is the core of a country’s financial system as it helps in the mobilisation of resources.
  3. Through this market, corporates, industrial organisations, financial institutions access long-term funds from both domestic as well as foreign markets.
  4. Capital market also contribute to capital formation in the economy.
  5. Hence, capital market is useful for corporate sector.

4.There are many participants in money market.

SOLUTION

  1. In the money market, lending and borrowing of funds take place for a short period of time, which may vary from one day to a year.
  2. Participants of the money market include RBI, Central and State governments Public Sector Undertakings, Scheduled commercial banks, Insurance companies, Mutual funds, Non-Banking Finance Companies, Corporates, Primary dealers, etc.

Answer the following question

1.Explain the functions of financial market.

SOLUTION

A financial market is a place where financial instruments or assets are exchanged or bought and sold. Financial markets help to mobilise savings and convert it into investments. They also attract funds from investors and channelize them to corporations.

The functions of the financial market are as follows:

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. Excess funds of the investors are used by the borrowers 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 individual and national income.

4) CAPITAL FORMATION: Capital formation is the net addition to the existing stock of an economy’s capital. The financial market provides a channel through which savings flow to industrial and commercial organisations in the form of capital. This leads to capital formation.

5) PRICE DETERMINATION: The financial instruments traded in the financial market get their prices from the mechanism of demand and supply. The interaction between the suppliers of the funds, i.e. investors and the users, i.e. corporates, as well as the other market factors helps 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) MOBILISING FUNDS: Investors having idle funds or savings must be linked with corporates that require investment. Thus, the financial market enables investors to invest their saving 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 the financial instruments, i.e., at any given time, the investor can sell these instruments and convert them into cash. It is an important factor for investors who do not want to invest for a long period.

2.State the instruments in money market.

SOLUTION

Financial instruments are documents in the form of a legal agreement between two parties having a monetary value. It represents a financial asset to one party and a financial liability to another party. In the money market, only those financial instruments are traded which are immediate substitutes 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 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. The minimum value of T-bills is 25,000 or in multiples of 25000. These are issued at a discount and repaid at par and hence they are also called Zero-Coupon Bonds.

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 the 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 it 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 a maximum 1 year. The minimum value of CP is 5 lakhs or in multiples of 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 1 lakh or in multiples of 1 lakh. They can be issued at a discount to the face value. They have a maturity period of minimum 7 days and maximum 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 are 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 investment 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 invests in debt instruments which 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.

SOLUTION

It is the market for borrowing and lending long-term capital required by business enterprises. As per SEBI, the capital market is a market for long-term debt and equity shares.

The features of the capital market are as follows:

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: In the capital market, medium and long-term financial instruments are traded. Through this market, corporates, industrial organisations, financial institutions access long-term funds from both, domestic as well as foreign markets.

3) PRESENCE OF INTERMEDIARIES: Capital market operates with the help of intermediaries. The intermediaries like brokers, underwriters, merchant bankers, collection bankers, etc. play an important role in the capital market.

4) PROMOTES CAPITAL FORMATION: Capital market provides a platform for investors and borrowers of long-term funds to engage in trade. This leads to capital formation in the economy as it mobilises funds.

5) REGULATED BY GOVERNMENT RULES, REGULATIONS, AND POLICIES: 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: It trades in both, marketable and non-marketable securities. Marketable securities are securities that can be transferred. E.g.: shares, debentures, etc. Non-marketable securities are those which cannot be transferred. E.g.: term deposits, loans, and advances.

7) VARIETY OF INVESTORS: It has a wide variety of investors including both, individuals (i.e. general public) and institutional investors like mutual funds, insurance companies, financial institutions, etc.

8) RISK: Risk is very high as the instruments have long maturity periods. But along with that, the return on investments is also very high.

9) INSTRUMENTS: Equity shares, preference shares, debentures, bonds, government securities and public deposits are the main instruments in capital market.

10) TYPES: Capital market is mainly classified into two main types, government securities market or gilt-edged market and industrial securities market. Industrial securities market is further classified into the primary and secondary markets.

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