S.Y.J.C. (Commerce) Prof.

Vijay Patil

****************************************************************************************************************

CHAPTER 11 – FINANCIAL MARKET

****************************************************************************************************************

Q.1. Explain the Functions of Financial Market.

Ans: A) MEANING:
A Financial Market is a place where financial instruments or assets
are exchanged, bought to sold. Financial Markets help to mobilise savings
and convert it into investments.

B) FUNCTIONS OF FINANCIAL MARKET:

1. Productive usage:
 Financial Market allows productive use of the funds.
 Excess funds of investors are used by the borrowers for productive
purposes.

2. Enhancing income:
 Financial Market allows lenders to earn interest or dividend on their
surplus funds.
 It leads to enhancement of individual and national income.

3. Transfer of resources:
 Financial Market facilitates the transfer of real economic resources
from lenders to ultimate users.

4. Capital formation:
 The capital formation is the net addition to existing economy's
capital.
 Financial Markets help to mobilise savings and convert it into
investments.
 This leads to capital formation.

5. Price determination:
 The price of financial instruments depends on the demand and
supply in a financial market.

-1-
S.Y.J.C. (Commerce) Prof. Vijay Patil

 The interaction between the suppliers of the funds 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:
 Financial Market enables the investors to invest their saving
according to their choices and risk assessment.
 This will utilise idle funds and the economy will boom.

8. Industrial development:
 Financial Market helps in transforming savings into capital.
 Corporates use the funds of investors to undertake productive or
commercial activities.
 Thereby, leading to industrial and economic development.

9. Liquidity:
 Financial Market provides a mechanism for liquidating the financial
instruments.
 At any given time, the investor can sell these instruments and
convert them into cash.

10. Easy access:

 Both, investors and industries need each other.
 The Financial Market provides a platform where both, the buyers
and sellers can easily find each other.

C) CONCLUSION:
The Financial Market raises finance for long term [Capital Market]
and for short term [Money Market].

-2-
S.Y.J.C. (Commerce) Prof. Vijay Patil

Q.2. Distinction Between:

1. Primary Market & Secondary Market:

Primary Market Secondary Market

1. Meaning:
The issue of new shares by the The securities issued earlier are
company is done in the primary traded in the secondary market.
market.
2. Mode of Investment:
The securities are acquired directly The securities are acquired from other
from the company. stakeholders.
3. Type of Investment:
It involves direct investment in It involves indirect investment in
securities. securities.
4. Parties:
The parties dealing in the market are The parties dealing in the market are
company and investors. only investors.
5. Intermediary:
The underwriters are the The security brokers are the
intermediaries. intermediaries.
6. Value of security:
The price of security in primary The price of security in secondary
market is fixed. market is fluctuating.

2. Money Market & Capital Market:

Money Market Capital Market

1. Meaning:
It is a market where in lending and It is a market for long term funds (both
borrowing of short term funds take equity & debt) raised within and
place. outside the country.

-3-
S.Y.J.C. (Commerce) Prof. Vijay Patil

2. Types:
It is market for short term It is a market for long term
instruments such as trade bills, instruments such as bonds,
government securities, promissory debentures, equity shares, mutual
notes, etc. funds, etc.
3. Includes:
It includes: It includes:
a. Reserve Bank of India a. Government Securities Market
b. Commercial Banks b. Industrial Securities Market
c. Co-operative Banks c. Stock Exchange
d. DFI, DFHI, etc. d. DFIs and Financial Intermediaries.
e. Indigeneous Bankers
f. Money Lenders, etc.
4. Time period:
In money market, the instruments In capital market, the instruments
traded have maturity period of one traded have maturity period of more
year or less than one year. than one year.
5. Return:
Return on investment is less as money Return on investment is
market is safe. comparatively high as capital market
is risky.
6. Role in economy:
This market increases liquidity of This market helps in mobilisation of
funds in the economy. savings in the economy.

OBJECTIVE TYPE QUESTIONS

A) Select the correct answer from the options given below and rewrite
the statements.
1. A financial market is a market in which people trade _____________ and
derivatives at low transaction costs.
(a) Gold (b) Financial securities (c) Commodities

-4-
S.Y.J.C. (Commerce) Prof. Vijay Patil

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

_____________
(a) Treasury bills (b) Commercial bills (c) Commercial papers

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

_____________ term.
(a) short (b) medium (c) long

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

of _____________
(a) Commercial Papers (b) Trade Bills (c) Treasury Bills

5. _____________ is the market for borrowing and lending long term capital
required by business enterprises.
(a) Money Market (b) Capital Market (c) Gold Market

6. A market where existing securities are resold or traded in called

_____________ market.
a) commodity b) secondary c) primary

7. Secondary market is more commonly known as the _____________ market.

a) stock b) new issues c) fresh issues

8. Securities that can be transferred are called _____________ securities.

a) marketable b) non marketable c) gold

9. _____________ market stand at greater risk but, offer high returns on

investments.
a) money b) capital c) gold

B) Write a word or a term or a phrase:

1. A market where people trade financial securities Financial Market
and derivatives at low transaction costs.
2. A market that provides long-term funds. Capital Market
3. A market that provides short-term funds. Money Market

-5-
S.Y.J.C. (Commerce) Prof. Vijay Patil

4. A money market instrument is used by banks when Call Money

one bank faces a temporary shortage of cash.
5. A bill is issued by the Reserve Bank of India on Treasury Bill
behalf of the Government of India.
6. A market that exclusively deals with the new issue Primary Market
of securities.
7. A market place where existing securities are bought Secondary
Market
and sold.
8. The organisation which acts as an intermediary Financial Market
between investors and borrowers.

C) State whether the following statements are True or False.

1. A Financial Market is a market in which people trade financial False
securities and derivatives at high transaction costs.
2. The money market is the market for long-term funds. False
3. The capital market is the market for long-term funds. True
4. The primary market is also known as the new issue market. True
5. The secondary market is commonly known as the stock market. True
6. Commercial paper is a secured promissory note. False
7. Treasury bills are issued by commercial banks. False
8. There is no fresh issue in the secondary market. True
9. The two types of industrial securities market are primary False
market and money market.
10. Money market has no geographical area. True

D) Find the odd one.

1. treasury bills, shares, certificate of deposit.
2. FPO, private placement, commercial paper.
3. new issues market, call money market, secondary market.
4. public deposits, equity shares, notice money.
5. gift edged market, industrial securities market, t-bills market.

-6-
S.Y.J.C. (Commerce) Prof. Vijay Patil

6. money market, capital market, foreign market.

7. SIDBI, EXIM Bank, World Bank.
8. commercial bills, equity, repo.

E) Complete the Sentences.

1. Funds borrowed and lent in money market are for Short
_____________ term.
2. When trade bills are accepted by commercial banks, it is Trade Bill
known as _____________
3. Unsecured negotiable promissory notes issued by a Certificate
commercial bank is called as _____________ of Deposit
4. New shares, debentures, etc. are traded in _____________ Primary
market.
5. In capital market the instruments traded have maturity One
period of more than _____________ year.
6. In _____________ market, the securities are traded between Secondary
investors.
7. Gift edged market can also be called as the _____________ Government
market. securities
8. As per _____________ capital market is a market for long SEBI
term debt and equity shares.
9. _____________ rate is the rate at which banks borrow from Repo
RBI.

F) Select the correct option from the bracket.

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

Group ‘A’ Group ‘B’

1) Money Market a) Fund for short term
2) Zero risk instrument b) Treasury bills
3) Fund for long terms c) Capital Market
4) Buying and selling of d) Secondary Market
existing securities

-7-
S.Y.J.C. (Commerce) Prof. Vijay Patil

G) Correct the underlined word/s and rewrite the following sentences.

1. In the Primary market, already existing securities are Secondary
traded.
2. Companies sell fresh shares for the first time to the Primary
public in the secondary market.
3. In the Money market, the instruments traded have a Capital
maturity period of more than one year.
4. The financial market can be classified as a capital Money
market and call money market.

H) Explain the following terms / concepts.

1. Financial Market:
Ans: Explanation:
 A Financial Market is a place where financial instruments or assets are
exchanged, bought to sold.
 Financial Markets help to mobilise savings and convert it into investments.
 It acts as an intermediary between investors and borrowers.

2. Money Market:
Ans: Explanation:
 Money Market is a market where in lending and borrowing of short term
funds take place.
 Money Market is market for short term instruments such as trade bills,
government securities, promissory notes, etc.
 Money Market includes:
a. Reserve Bank of India
b. Commercial Banks
c. Co-operative Banks
d. DFI, DFHI, etc.
e. Indigeneous Bankers
f. Money Lenders, etc.

-8-
S.Y.J.C. (Commerce) Prof. Vijay Patil

3. Capital Market:
Ans: Explanation:
 Capital Market is a market for long term funds (both equity & debt) raised
within and outside the country.
 Capital Market is a market for long term instruments such as bonds,
debentures, equity shares, mutual funds, etc.
 Capital Market includes:
a. Government Securities Market
b. Industrial Securities Market
c. Stock Exchange
d. DFIs and Financial Intermediaries.

4. Primary Market:
Ans: Explanation:
 The issue of new shares by the company is done in the primary market.
 The securities are acquired directly from the company.
 It involves direct investment in securities.
 The parties dealing in the market are company and investors.
 The underwriters are the intermediaries.
 The price of security in primary market is fixed.

5. Secondary Market:
Ans: Explanation:
 The securities issued earlier are traded in the secondary market.
 The securities are acquired from other stakeholders.
 It involves indirect investment in securities.
 The parties dealing in the market are only investors.
 The security brokers are the intermediaries.
 The price of security in secondary market is fluctuating.

-9-
S.Y.J.C. (Commerce) Prof. Vijay Patil

6. Call Money Market:

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

7. Treasury Bills:
Ans: Explanation:
 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 maximum value of T-bills is Rs. 25,000/- or in multiples of
Rs. 25,000/-
 These bills are also called zero coupon bonds.
 T-bills have three maturity periods – 91 days, 182 days and 364 days.

I) Justify the following statements:

1. The financial market contributes towards the nation’s growth and
development.
Ans: This statement is True.
Explanation:
 A Financial Market is a place where financial instruments or assets are
exchanged, bought to sold.
 Financial Markets help to mobilise savings and convert it into investments.
 Financial Market allows lenders to earn interest or dividend on their
surplus funds.
 Corporates use the funds of investors to undertake productive or
commercial activities.

- 10 -
S.Y.J.C. (Commerce) Prof. Vijay Patil

 Thereby, leading to industrial and economic development.

 Hence, the financial market contributes towards the nation’s growth and
development.

2. Financial Markets act as link between investor & borrower.

Ans: This statement is True.
Explanation:
 A Financial Market is a place where financial instruments or assets are
exchanged, bought to sold.
 Financial Markets help to mobilise savings and convert it into investments.
 Both, investors and industries need each other.
 The Financial Market provides a platform where both, the buyers and
sellers can easily find each other.
 Hence, Financial Markets act as link between investor & borrower.

3. Money market makes available short-term finance through different

instruments.
Ans: This statement is True.
Explanation:
 Money Market is a market where in lending and borrowing of short term
funds take place.
 Money Market is market for short term instruments such as trade bills,
government securities, promissory notes, etc.
 It includes:
a. Reserve Bank of India
b. Commercial Banks
c. Co-operative Banks
d. DFI, DFHI, etc.
e. Indigeneous Bankers
f. Money Lenders, etc.
 In money market, the instruments traded have maturity period of one year
or less than one year.

- 11 -
S.Y.J.C. (Commerce) Prof. Vijay Patil

 Return on investment is less as money market is safe.

 This market increases liquidity of funds in the economy.

4. Capital Market is useful for corporate sector.

Ans: This statement is True.
Explanation:
 Capital Market is a market for long term funds (both equity & debt) raised
within and outside the country.
 Capital Market is a market for long term instruments such as bonds,
debentures, equity shares, mutual funds, etc.
 It includes:
a. Government Securities Market
b. Industrial Securities Market
c. Stock Exchange
d. DFIs and Financial Intermediaries.
 In capital market, the instruments traded have maturity period of more
than one year.
 Return on investment is comparatively high as capital market is risky.
 This market helps in mobilisation of savings in the economy.

STUDY THE FOLLOWING CASE / SITUATION &

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 primary market or secondary market to issue its
shares?
Ans: The issue of new shares by the company is done in the primary market.
So, Joy Ltd. should go to primary market to issue its shares, because it is
a newly incorporated company.

- 12 -
S.Y.J.C. (Commerce) Prof. Vijay Patil

2. Should it offer its shares through public offer or rights issue?

Ans: Joy Ltd. wants to raise capital for first time by issuing equity shares.
So Joy Ltd should offer its shares through public offer.

3. What will be the issue of Equity shares by Joy Ltd. Company called
IPO or FPO?
Ans: The issue of equity shares by Joy Ltd. Co. will be called as IPO which
means Initial Public Offer.

---------------------------------------------------------------------------------------------------------------------------------

- 13 -