L-16-
FINANCIAL MARKET, CAPITAL MARKET AND MONEY MARKET
A. One Word or One Line Questions
Q. 1. What is meant by
financial market?
Ans. The market related to the origin
and exchange of financial assets is known as financial market.
Q. 2. Name the types of
financial market.
Ans. (i) Money Market (ii) Capital
Market.
Q. 3. Write any two
functions of a financial market.
Ans. (i) To provide liquidity to
financial assets. (ii) Provide Financial Information and helping in Economic
Growth.
Q. 4. What is money market?
Ans. That part of financial market in
which transactions of short period funds take place, is known as money market.
Q. 5. Name any two
instruments of money market.
Ans. (a) Treasury bills (b)
Commercial bills.
Q. 6. What are treasury bills?
Ans. Treasury bills are an instrument
of obtaining short period funds by the Government of India.
Q. 7. What is capital market?
Ans. That part of financial market in
which transactions of long period funds, both equity and debt; take place is
known as capital market.
Q. 8. Name the types of
capital market.
Ans. Primary market and secondary
market.
Q. 9. What is primary market?
Ans. That part of capital market in
which newly issued long term securities, are traded. Is known as primary
market.
Q. 10. What is secondary market?
Ans. That part of capital market in
which transactions of existing securities take place, is known as secondary
market.
B.
Fill in the Blanks
1.
Primary market
directly contributes to capital formation.
2. Money market helps to obtain short period funds.
3. Short term promissory notes issued
by a reputed company are called commercial papers.
4. Primary market is also called new issue market.
5. Offer through prospectus is a
method of initial public offer.
C.
True or False
1. Dividend decision of a company is
related with the distribution of profit among debentureholders. False
2. Under rights issue, present
shareholders are given opportunity to acquire new shares. True
3. Primary market deals in all types
of securities. False
4. Secondary market is also known as
stock market. True
D.
Multiple Choice Questions
1. Which market directly
contributes to capital formation?
(a) Money market (b) Primary market
(c) Secondary market (d) Finance market.
Ans. (b) Primary market
2. Which instrument of
money market is generally used for inter-bank transactions?
(a) Treasury bills (b) Commercial
papers
(c) Call money (d) Both (a)
and (c).
Ans. (c) Call money
3. Under which method of
new issue market, securities are sold to institutional investors and selected individuals?
(a) Right issue (b) Private
placement
(c) Offer for sale (d) Both (a) and (c).
Ans. (b) Private placement
4. Which instrument of
money market is used to obtain finance against credit sales of firms?
(a) Commercial bills (b) Call
money
(c) Certificates of
deposits (d) Both
(b) and (c).
Ans. (a) Commercial bills
5. Which market deals in
sale and purchase of previously issued securities?
(a) Primary market (b) Secondary
market
(c) Capital market (d) None of
these.
Ans. (b) Secondary market
Two
Marks Questions:—
Q. 1. What is financial
market?
Ans. The market related to the origin
and exchange of financial assets is known as financial market. Where there is a
financial transaction, there is the existence of financial market. Financial
market does not exist at a particular geographical place, rather where there is
any financial transaction, there is the existence of financial market.
Financial market acts as an intermediary between those who save funds and those
who need funds for investment.
Q. 2. What is money market?
Ans. That part of financial market in
which transactions of short period funds take place, is known as money market.
Such short period securities are exchanged in the money market whose maturity
period is not more than one year. The securities of money market are highly
liquid and these are close substitute of money. The risk in money market is
very low and in it, financial transactions take place without any security.
Q. 3. What is capital
market?
Ans. That part of financial market in
which transactions of long period funds, both equity and debt, take place; is
known as capital market. Capital market refers to all such institutional
arrangements which help in borrowing and lending of long term funds. Capital
market is in the form of an organised market. It helps to make available the
savings for long term investment. This promotes industrial development and
economic growth of the country.
Q. 4. What is primary
market?
Ans. That part of capital market in
which newly issued long term securities, i.e. long term securities issued for
the first time, are traded, is known as primary market. As this market is
related with the trading of new securities, it is also known as New Issue
Market. In the primary market, both new companies and old companies can acquire
long term funds. In it, long period funds can be obtained with the help of new
securities.
Q. 5. What is secondary
market?
Ans. That part of capital market in
which transactions of existing securities take place, is known as secondary
market. Because existing securities or 'stock' securities are sold and
purchased in secondary market, that is why secondary market is also known as
'stock market' or 'stock exchange'.
Four
Marks Questions:
Q. 1. Write the functions
of financial market.
Ans. 1. Mobilization of Savings: Financial market makes
available various alternatives regarding financial investment to those who save
funds. This promotes people to save funds. Hence, financial market performs the
function of helping in the mobilization of savings.
2.
Allocation of Funds: Through the process of financial
intermediation, financial market transfers the funds from those who save funds
to those who invest the funds.
3.
To Provide Liquidity to Financial Assets: In the financial
market, financial assets can be sold and purchased very easily. Hence,
financial market imparts liquidity to financial assets.
4.
Helpful in Economic Growth: An important component of financial
market is capital market. Capital market supplies long period funds to the
investors. This helps in the industrialization and economic development of the
country.
Q. 2. Discuss in brief
functions of money market.
Ans. 1. Money market makes available
short period funds to those parties who need those funds.
2. Money market ensures short term
liquidity for business enterprises and various institutions, financial assets
exchanged in it are a close substitute of money.
3. Money market makes available short
period funds to banks, financial institutions, mutual funds and government etc.
4. Money market establishes an equilibrium
between the demand for and the supply of short period funds.
5. Money market provides the facility
to commercial banks, financial institutions and business enterprises to
maintain a satisfactory position regarding liquidity and also to make suitable
requisite adjustments in it.
Q. 3. Discuss the nature of
capital market.
Ans. 1. Source of Long Period Funds: Capital market is
a source of long period funds. It helps in lending and borrowing of long period
funds
2.
Deals in Equity and Debt: In the capital market, the
transactions of both, owners' funds and borrowed funds take place.
3.
Primary Market and Secondary Market: Capital market can be
divided in two parts primary market and secondary market
4.
Existence of Intermediaries: There are several intermediaries
present in the process of sale and purchase of securities in the capital market
such as brokers, underwriters, banks, financial institutions etc.
Q. 4. Write role of primary
market.
Ans. It mobilizes the savings for investment
in the long period.
(i) Primary market helps to allocate
the long term savings among various sectors.
(ii) It acts as an intermediary
between long period lenders and hammers.
(iii) Primary market helps to issue
new securities.
(iv) Long period funds in both the
forms i.e. equity and debt can be obtained from the primary market.
(v) New enterprises, as well as
existing enterprises can obtain the funds from the primary market.
Q. 5. Discuss any four
points of difference between primary market and secondary market.
Ans.
|
Primary Market |
Secondary Market |
|
Transactions of new
securities take place in the primary market. In the primary market, the sale of
securities by the enterprise or the company is done either directly by itself
or through any financial intermediary. Primary market promotes the process
of capital formation in the country directly. Investment made in the primary
market is long term investment. |
Transactions of old or existing
securities take place in the secondary market. In the secondary market, investors
transfer the ownership of the securities among themselves without any involvement
of the enterprise or the company. Secondary market promotes the
process of capital formation in the country indirectly.
Investment made in the secondary
market is short term investment. |
Q. 6. Write any four points
of difference between capital market and money market.
Ans.
|
Money Market |
Capital Market |
|
Treasury bills,
commercial papers, commercial bills, certificates of deposits, call money
etc. are the instruments of the money market. Its main constituents
are central bank, commercial banks, non-banking financial companies etc. A huge amount of
funds is exchanged in the money market because under it generally the
transactions between financial institutions and banks take place. Money market generally makes funds available
for working capital. |
Equity shares,
preference shares, debentures, bonds etc. are the instruments of capital
market. Its main constituents
are stock exchanges, mutual funds, insurance companies etc. A small amount of
funds can also be exchanged in the capital market. In it, 100 shares of 10
each can also be purchased. Capital market makes funds
available for investment in fixed assets also. |
