Meaning, Functions & Classification of Financial Market

1 Mark Questions

1. State any one consequence of a well performed allocative function of financial market.(Delhi 2013)

Ans. Providing liquidity to financial assets.

1. Name the two major alternative mechanisms through which allocation of funds can be done. (All India 2013)

Ans. (i) Banks

1. Financial markets

3. Give the meaning of secondary market. (Delhi 2013)

Ans. Secondary market refers to market for sale and purchase of previously issued securities. It is also known as stock exchange.

4. Give the meaning of money-market. (Delhi 2013)

Ans. Money-market refers to market for short-term funds, which deals in monetary assets whose period of maturity is upto one year.

5. State the essential function of primary market. (All India 2013)

Ans. The important function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs, seeking to establish new enterprises.

6. What is meant by capital market? (Delhi 2011c)

Ans. Capital market refers to whole network of organisations, institutions through which medium and long-term funds, both debt and equity are raised and invested.

7. What is meant by 'primary market'? (All India 2011)

Ans. Primary market is the market where securities are being issued for the first time. Therefore, it is also known as 'New Issue Market' (NIM).

3 Marks Questions

1. Give the meaning of the following money market instruments
2. Certificate of deposit; and
3. Commercial bill (Compartment 2014; Foreign 2014)

Ans. (i) Certificate of deposit These are short-term, unsecured, negotiable instruments in bearer form. They are issued by commercial banks or development financial institution to individuals, corporations and companies. These are issued generally in times of tight liquidity when the deposit growth of banks is slow but the demand for credit is high, to mobilise large amounts of money for short periods.

1. Commercial bill A commercial bill is a bill of exchange used to finance the working

capital requirements of business firms. It is a short-term negotiable, self-liquidating instrument, whijch is used to finance the credit sale of the firms. When goods are sold on credit, seller draws the bill of exchange on the buyer. On being accepted by the buyer, it becomes a trade bill, which is a marketable instrument. On being discounted from the bank, the trade bill becomes the commercial bill.

1. Give the meaning of the following money market instruments (i)Treasury bill; and

(ii)Call money (Compartment 2014; Foreign 2014)

Ans. (i) Treasury bill Also known as zero coupon bond, an T-Bill is issued by RBI on behalf of Central Government to meet its short-term requirement of funds It is issued in form of promissory note.

They are highly liquid and have negligible risk. They are issued at discount and redeemed at par, e.g. 91 days, treasury bill of face value of? 1,00,000 is purchased at? 96,000 and at the maturity investor gets? 1,00,000, ? 4000 being the interest received by him.

1. Call money Call money is a short-term finance repayable on demand, with a

maturity of 1 to 15 days. It is used for inter bank transactions. Banks have to maintain a minimum cash balance known as Cash Reserve Ratio. RBI changes this ratio from time to time. Call money is a method by which banks borrow from each other to be able to maintain Cash Reserve Ratio. The interest paid on call money loans is called call rate, which is very volatile and changes even from hour to hour.

1. Financial market plays an important role in the allocation of scarce resources

in an economy by performing various functions. Explain any three functions of financial market. (Delhi 2014)

Ans. Financial market plays an important role in the allocation of scarce resources in an economy by performing these important factions:

1. Mobilisation of savings and channeling them into the most productive uses A

financial market facilitates the transfer of savings from savers to investors. Thus, it will help in channelising surplus funds into the most productive uses.