Chapter 10: Financial Markets SUBHASH DEY (Shree Radhey Publications) 57

10.1 | Financial Markets: Concept, Functions and Types

Concept of Financial Market
A
financial market is a market for the creation and exchange of financial assets.
Financial markets exist wherever a financial transaction occurs. Financial transactions could be in the form of
crearion of financial assets such as the initial issue of shares and debentures by a firm or the exchange (.e.,
purchase and sale) of existing financial assets like equity shares,debentures and bonds.
Àbusiness is a part of an economic system that consists of two main sectors - households which save funds and
business firms which invest these funds.

Households FINANCIAL Business Firms

(Savers) MARKETS (Investors)

Afinancial market helps to link the savers and the investors by mobilising funds between them. In doing so it
performs the 'allocative function. It allocates or directs funds available for investment into their most productive
investmentopportunity.
Top Tip
The process bywhich allocation of funds is done is called "financial intermediation'.
Consequences of allocative function
When the allocative function is performed well, two consequences follow:
1. The rate of return offered to the households would be higher.
2. Scarce resources are allocated to those firms which have the highest productivity for the economy.
Alternative mechanisms of allocation of funds
There are two major alternative mechanisms through which allocation of funds can be done:
1. via banks Households can deposit their surplus funds with banks, who in turn could lend these funds
to business firms.
2. via financial markets Households can buy the shares and debentures offered by a business using
financial markets.
Business Firms

Banks

Financial Markets

Households

Financial System

Thus, banks and financial markets are competing intermediaries in the system, and give households a choice of
where thcy want to place their savings.
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58 sUBHASH DEY (Shree Radhey Publications)
Functions of Financial Markets
Financial markets play an important role in the allocation of scarce resources in an cconomy by performing the
following four important functions:
1. Allocative function mobilisation of savings and channeling them into the most
productive uses
A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different
investments and thus helps to channelise surplus funds into the most productive use.
2. Facilitating price discovery
In the financial market, the households are suppliers of funds and business firms represent the demand. The
interaction between the forces of demand and supply helps to establish a price for a financial asset being traded
in the financial market.

3. Providing liquidity to fnancial assets

Financial markets facilitate easy purchase and sale of financial assets. In doing so, they provide liquidity to
financial assets so that they can be easily converted iinto cash whenever required. Holders of assets can readily sell
their financial assets through the mechanism of the financial market.
4. Reducing the cost of transactions
Financial markets provide valuable information about securities being traded in the market. It helps to save time,
effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find
cach other. The financial market is thus, a common platform where buyers and sellers can neet for fulfilment of
their individual needs.

Types of Financial Markets

Financial markets are classified on the basis of the maturity of financial instruments traded in them.
Instruments with a maturity of less than one ycar are traded in the money market.
Instruments with longer maturity are traded in the capital market.
FINANCIAL
MARKET

Money Market Capital Market

Primary Market Secondary Market

Debt Equity Debt Equity

Money Market
Money market is a market for short term funds which deals in monetary assets whose period of maturity
is up to one year.
It enables the raising of short-term funds for meeting the temporary shortages of cash and obligations and the
temporary deployment of excess funds for earning returns.
Major participants in the money market
The Reserve Bank of India (RBI) Commercial Banks
" Non-Banking Finance Companies State Governments
Large Corporate Houses Mutual Funds
 Chapter 10: Financial Markets sUBHASH DEY (Shree Radhey Publications) 59

Features of money market instruments

1. Money market instruments are close substitutes for money.
2. These are unsecured and short term debt securities.
3. Money market instruments are less risky.
4. Money market instrumentsare highly liquid.

Top Tip
Money market is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued
and actively tradedeveryday. It has no physical location, but is an activity conducted over the telephone and through the
internet

Money Market Instruments

Money
Market
Instruments

Certificate of Commercial
Commercial Treasury bill Call money
bill
paper deposit

1. Commercial paper
Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and
delivery with a fixed maturity period.
It is issued by large and creditworthy companies/financially strong companies to raise short-term funds at
lower rates of interest than market rates.
" It usually has a maturity period of 15 days to one year.
Purposes of funds raised through commercial paper:
(i) To provide short-terms funds for seasonal and working capital needs.
(ii) To meet the flotation costs of new issues of securities, e.g., brokerage, commission, printing of
applications and advertising, etc. This is known as Bridge Financing'.
" The issue of commercial paper is an alternative to bank borrowing.
" It is sold at a discount and redeemed at par.
2. Treasury bill
India on behalf of
ATreasury bill is an instrument (in the form of a promissory note) issued by Reserve Bank of
the Central government to meet its short term requirements of funds.
It is highly liquid, has an assured yicld and negligible risk of default.
Treasury Bills can be issued for aminimum amount of{25,000 and its multiples thereof.
is lower
Treasury Bills are also known as Zero Coupon Bonds' because they are issued at a price which
than their face value and repaid at par. The difference between the price at which the treasury bills are
issued and their redemption value is the interest receivable on them and is called discount. For example.
By
suppose an investor purchases a 91 days Treasury bill with a face value of 1,00,000 for 95.000.
holding the bill until the maturity date, the investor receives 1,00,000. The difference of5,000 berween
theproceeds received at maturity and the amount paid to purchase the bill represents the interest received
by him.
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60 SUBHASH DEY (Shree Radhey Publications)
3. Call money
Callmoney is short term finance used for inter-bank transactions.
" Call money is a method by which banks borrow from cach other to be able to maintain the cash
reserve
ratio.

Commercial banks have to maintain a nminimunn cash balance known as cash reserve ratio. The Reserve Bank of India cBhanges the
cash resene ratio from ine to time which in tun aflects the anount of fuds available to be given as loans by commercial banks.

" It is repayable on demand, with a maturity period of one day to 15 days.

" The interest rate paid on call money loans is known as the 'call rate'. It is a highly volatile rate that
varies from day-to-day and sometimes even from hour-to-hour. There is an inverse relationship between
call rates and other short-tern money market instruments such as certificates of deposit and commercial
paper. Arise in callmoney rates makes other sources of finance such as commercial paper and certificates
of deposit cheaper in comparison for banks raise funds from these sources.
4. Certificate of deposit
Cerificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by
commercial banks and development financial institutions.
CDs are issucd during periods of tight liquidity when the deposit growth of banks is slow but the demand
for credit is high.
They can be issued to individuals, corporations and companies.
They help to mobilise a large amount of money for short periods.
5. Commercial bill
A commercial bill is a short-term, negotiable, self-liquidating instrument which is used to finance the
credit sales of firms.
" It is a bill of exchange used to finance the working capital requirements of business firms.

When goods are sold on credit, the buyer becomes liable to nmake payment onaspecific date in future. The seller could waut ill dhe
specitied date or make use of abill of exchange.The seller (drawer) of the goods draws he bill and the buyer (drawee) accepts it.
Onbeing accepted, he bill becomes a marketable instrument and is called a trade bill. These bills can be discouted with a bank if
tle seller eeds funds lefore the bill matures. When a trade bill is accepted by a comnercial bank it is known as a comnereial bill.

Capital Market
Capital market refers to facilities and institutional arrangements through which medium and long-term
funds, both debt and equity are raised and invested.
Typesof Capital Market
The capital market can be divided into two parts:
1. Primary Market (New Issues Market)
2. Secondary Market (Stock Exchange)
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60 SUBHASH DEY (Shree Radhey Publications)
3. Call money
Call money is short term finance used for inter-bank transactions.
" Call money is a method by which banks borrow from cach other to be able to maintain the cash reserve
ratio.

Commercial banks have to maintaina minimun cash balance known as cash reserve ratio. The Reserve Bank of Indiachanges the
cashresene ratio from time to time which in tunn aflects the amount of funds available to be given as loans by commercial bauks.

" It is repayable on demand, with a maturity period of one day to 15 days.

The interest rate paid on call money loans is known as the 'call rate'. It is a highly volatile rate that
varies from day-to-day and sometimes even from hour-to-hour. There is an inverse relationship between
call rates and other short-term money market instruments such as certificates of deposit and commercil
paper. A rise in call money rates makes other sources of finance such as commercial paper and certificates
of deposit cheaper in comparison for banks raise funds from these sources.
4. Certificate of deposit
Certificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by
commercial banks and development financial institutions.
CDs are issued during periods of tight liquidity when the deposit growth of banks is slow but the demand
for credit is high.
They can be issued to individuals, corporations and companies.
They help to mobilise a large amount of money for short periods.
5. Commercial bill
A commercial bill is a short-term, negotiable, self-liquidating instrument which is
credit sales of firms. used to finance the
" It is a bill of exchange used to finance the working capital
of requirements business firms.

When goods are sold on credit, the buyer becomes liable to

specilied date or make use of a bill of exchange. The seller make payment on a specifie date in future. The seller could wait till the
(drawer) of the goods draws the bill and the buver
On being accepled, he lbill becoes a (drawee) acrepts it.
Uhe seller needs lunds belore he bill marketable instrument and is called a trade lbill. These bills can be
natures. Wlhen a rade billis accepted by a comercial bank it is discounted witlh a lbank it
known as a commerCal bill.

Capital Market
Capital market refers to facilities and institutional
funds, both debt and equity are raised and invested.
arrangemnents through which medium and long-term
Types of Capital Market
The capital market can be divided into two parts:
1. Primary Market (New Issues Market)
2. Secondary Market (Stock Exchange)
 Chapter 10: Financial Markets SUBHASH DEY (Shree Radhey Publications) 61
Features of capital market securities
1. The capital market deals in medium and
long term
securities such as equity shares and debentures, which CAPITAL MARKET
require less financial outlay.
2. Capital market securities are less liquid because a share may
not be actively traded, i.e. it may not casily find a buyer.
3, Capital market instruments are riskier both with
respect to
returns and principal repayment.
4. The investment in capital markets generally yicld a higher PRIMARY SECONDARY
return for investors. MARKET MARKET

Major participants in the capital market

Corporate entities
Stock exchanges
Development banks
Commercial banks
" Financial institutions
Foreign investors
Ordinary retail investors from members of the public

Capital market consists of a series of channels through which savings of the community are made available for industrial and
commercial enterprises and for public in general. It directs these savings into their most productive use leading to growth and
developnment of the economy. An ideal capital market is one where finance is available at a reasonable cost. The process of
economic development is facilitated by the existence of awell functioning capital market. The capital market should be eficient in
respect of the information that it delivers, minimise transaction costs and allocate capital most productively.

Distinction between Money Market and Capital Market

Basis Money Market - features Capital Market - features
Participants The participants are RBI, financial institutions, The participants are financial institutions. banks.
banks, corporates. corporates, foreign investors and retail investors.
Instruments Instruments traded are treasury bill, commercial Instruments traded are shares, debentures and
paper, certificates of deposit, call money and bonds.
commercial bill.
Investment Money market securities have a large investment Capiral market securities have small investment
outlay outlay e.g,, Treasury bills are available for a outlay as the value of units ot securities is generally
minimum amount of R25,000 and in multiples low, i.e.,10 or 100.
thereof.
Duration Money marker deals in short term securities whose Capital market deals in medium term and long
period of maturity is up to one year. term securities with aperiod of maturity of more
than one year.
Liquidity Money mrker instruments enjoy higher degree Capital market seurities are considered liquid but
of liauidiry. The Discount Finance House of less liquid than money market securities. They are
Jndia (DFHI) has been established for the specific marketable on the stock exchanges. However, a
objective of providing a ready market for money share may not be actively traded, i.c. it may not
market instruments easily find a buyer.
 62 SUBHASH DEY (Shree Radhey Publications) Business Studies XIl Part-B 2024-25 Edition

Safety Money market instruments are comparatively safer Capital market instrument are riskier than money
than capital market securities with a minimum market instruments both with respect to returns
risk of default due to the shorter duration of and principal repayment. Isuing companies may
investment and financial soundness of the issuers fail to pertorm as per procCtions and promoters
the government, banks and highly rated companics.may defraud investors.
Expected Money market securities yield comparatively less Generally yicld ahigher return than money market
return return due to shorter duration. instruments due to longer duration; scope of
carning capital gains in cquity share: prosperity
of a company is shared by shareholders by way of
|high dividends and bonus issues.

Primary Market - Concept and Methods of Floating New Issues

Concept of Primary Market
The primary market is also known as the New Issues Market. It deals with new securities being issued for the
first time.
The essential function of a primary market is to facilitate the transfer of investible funds from savers
to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of
securities for the first time.
The investors in this market are banks, financial institutions, insurance
individuals.
companies, mutual funds and
Acompany can raise capital through the primary market in the form of cquity shares,
debentures, loans and deposits. preference shares,
" Funds raised may be for setting up new projects, cxpansion,
diversification, modernisation of existing
projects, mergers and takeovers etc.
Methods of Floating New Issues in the Primary Market
1. Offer through prospectus: This is the most
popular
the primary market. This involves inviting subscriptionmethod
from the
of raising funds by public companies in
prospectus makes adirect appeal to investors to raise capital, throughpublic through issue of prospectus. A
an advertisement in newspapers and
magazines. The contents of the prospectus must be in accordance with the provisions of the Companies
Act and SEBIdisclosure and investor protection
listed on at least one stock exchange. guidelines. The issues may be underwritten and must be
2. Offer for sale: Under this method securities are not
issued directly to the public but are offered for sale
through intermediaries like issuing houses or stock brokers. In this case, a company sells securities en
bloc at an agreed price to brokers who, in turn,
3. resell them to the investing public.
Private placement: Private placement is the
investors and some selected individuals. It helps allotment of securities by a company to
to raise capital more quickly than a institutional
to the primary market can be expensive on public issue. Access
account of various mandatory and
Some companics, therefore,
cannot afford a public issue and choose non-mandatory expenses.
to use private placement.
4. Rights issue: This is a privilege given to existing
according to the terms and conditions of the company. shareholders to subscribe to a new issue of shares
new shares in proportion to the number of shares The shareholders are offered the 'right to buy
5. they already hold.
e-IPOs: A company proposing to isue capital to the
exchange has to enter into an agreement with the stockpublic through the on-line system of the stock
(IPO). SEBI registered exchange. This is called an Initial Public Offer
brokers have to be
placing orders with the company. The issuer appointed for the purpose of accepting applications and
clectronic connectivity with the exchange. The company should also appoint a registrar to the issue having
any exchange other than the issuer company can apply for listing of its
exchange through securities on
which it has offered its securities. The lead
t oordinates all the activities manager
amongst intermediaries connected with the issuc.
 Chapter 10: Financial Markets SUBHASH DEY (Shree Radhey Publications) 63

Secondary Market (Stock Exchange)

The secondary market is also known as the stock market or stock exchange.
Itis a market for the purchase and sale of existing securities.
It helps existing investors to disinvest and fresh investors to enter the market.
" It also provides liquidity and marketability to existing securities.
" It also contributes to economicgrowth by channelising funds towards the most productive investments
through the process of disinvestment and reinvestment.
Securities are traded, cleared and settled within the regulatory framework prescribed by SEBI.

Advances in infornmation technology have made trading hrough stock exchanges accessible from anywhere in the couitry through
radng teminals. Along with the growth of the priary narket in the country, the secondary market ha also grow signilicantly
duringthe last ten years.

Stock Exxchange
A stock exchange is an institution which provides
a platform for buying and selling of existing
securities.
As a market, the stock exchangefacilitates the exchange
of a security (share, debenture etc.) into money and
vice versa. Stock exchanges help companies raise
finance, provide liquidity and safety of investment
to the investors and enhance the credit worthiness of BUY SELL

individual companies.
According to Securities Contracts (Regulation) Act
1956, stock exchange means any body of individuals,
whether incorporated or not, constituted for the Stock exchange - a platform for buying and
purpose of assisting, regulating or controlling the selling of existing securities.
business of buying and selling or dealing in securities.
Distinction between Primary Market and Secondary Market
Basis Primary Market Secondary Market
Securities traded There is a sale of securities by new companies There is trading of existing securities only.
or further new issues of securities by existing
companies to investors.
Buying and Selling Only buying of securities takes place in the Both the buying and the selling of securities
primary market, securities cannot be sold there. can take place on the stock exchange.
Company Securities are sold by the company to theOwnership of existing securities is exchanged
involvement investors directly (or through an intermediary). between investors. The company Is not
involved at all.
Capital formation The low of funds is from savers to investors, Enhances encashability (liquidity) of securities,
ie. the primary market directly promotes capital | ie.capital
the formation.
secondary market indirecly promotes
formation.
Price determination Prices of securities are determined and decided| Prices are determined by demand and supply
by the management of the company. of the securities.

Location There is no fixed geographical location. Located at specified places.

64 SUBHASH DEY (Shree Radhey Publications) BusinessStudies XII Part-B 2024-25 Edition

RECAP

Meaning and Functions of Financial Markets functions:

Financial Market is a market for the creation and exchange of financial assets. It performs four mainchannelizing them into
of financial market means mobilization of savings and
1. Allocation Function - Allocative function
follow: (i) The rate of return
the most productive use. (When the allocative function is performed well, two consequences firms which have the highest
offered to the households would be higher. (ii) Scarce resources are allocated to those
productivity for the economy.)
interaction of forces of demand and supply.
2. Financial Market facilitates price discovery for financial assets by
easily converted into cash whenever required.
3. Financial markets provide liguidity to financial assets, so that they can be
traded in the market and thereby, help to reduce cost of
4. Financial markets provide valuable information about securities being
transactions in terms of time, effort and money.
Types of Financial Markets maturity
in monetary assets whose period of
Money Market: The money market is a market for short term funds which deals
money.
is up to one year. Money market instruments are close substitutes for
facilities and institutional arrangements through which medium and long-term funds, both
Capital Market: Capital market refers to
debt and equity are raised and invested.
Capital Market -Features
Basis PL SIDE Money Market - Features
The participants are RBI, financial institutions, banks, The participants are financial institutions, banks.
Participants corporates, foreign investors and retail investors.
Corporates.
debentures and
Instruments Instruments traded are treasury bill, commercial paper,Instruments traded are shares,
certificates of deposit, call money, etc. bonds.
Money market securities have a large investment Capital market securities have small investment
Investment
outlay. outlay.
outlay Money market deals in short term securities whose Capital market deals in medium term and long term
Duration
period of maturity is up to one year. securities with period of maturity of more than one
year.
Money market instruments enjoy higher degree of Capital market securities are considered liquid but
Liquidity |liquidity(The Discount Finance House of India) less liquidthan money market securities.
Safety Money marketinstruments are comparatively saferthan Securities in capital market are riskier with respect to
capital market securities with a minimum risk of default|return and principal repayment. Issuing company may
due tothe shorter duration of investment and financial failto perform as promoters may defraud investors.
soundness of the issuers -Govt., Banks and highly rated
Companies.
Expected Money market securities yield comparatively less Capital market is expected to give a better return in a
return return due to shorter duration. buoyant economy as: () The securities are held for a
longer duration. () There is a scope of earning capital
gains on shares.

Money market Instruments

1. Commercial Paper: It is a short-term unsecured, negotiable promissory note with a fixed maturity period of 15 days to
one year, which is issued by large and credit worthy companies to raise short term funds at lower rates of interest than
the market rates. " The issue of commercial paper is an alternative to bank borrowing " It is used to provide short term
funds for seasonal and working capital needs of the business. It is used to meet to flotation cost of new issue of shares
(i.e. bridge financing).
2. Treasury bill: It is an instrument (in the form of a promissory note) issued by Reserve Bank of India on behalf of the
Central government to meet its short term requirements of funds. It is highly liquid, has an assured yield and negligible
risk of default. Treasury Bills can be issued for aminimum amount of T25000 and its multiples thereof.
3. Callmoney is the method by which banks borrow from each other to be able to maintain the cash reserve ratio. It is repayable on
demand, with a maturity period of one day to 15 days.
4, Certificate of deposit: It is a short-term, unsecured, negotiable instrument issued by commercial banks or development
financial institutions to individuals, corporations and companies. It is issued during periods of tight liquidity when the
deposit growth of banks is low but the demand for credit is high.
5. Conmmercial bill: It is a bill of exchange used to finance the working capital requirements of business firms. It is a short
term, negotiable, self-liquidating instrument. It is used to finance the credit sales of firms.
 Chapter 10: Financial Markets SUBHASH DEY (Shree Radhey Publications) 65

Types of Capital Market

Primary Market (New lssues Market): It deals with new securities being issued for the first time.
Secondary Market (Stock Market or Stock Exchange): It is a market for the purchase and sale of existing securities.
Basis SC BPL Primary Market Secondary Market
Securities It involves issue of securities by new companiesIt involves trading of existing shares only.
traded or new issues of securities by existing companies
to investors.

Company Securities are sold by the companies to the Securities are exchanged between investors,
involvement investors directly. company is not involved at alII.
Capital It directly promotes capital formation. It indirectly promotes capital formation.
formation

Buying/selling Only buying of securities takes place. Both buying and selling of securities take place.
Price Prices are determined by management of the Prices are determined by the forces of demand
determination company. and supplyof securities.
Location It has no fixed geographical location. It has fixed geographical location.

Methods of floating new issues in the primary market ROPE

1. Offer through prospectus: It is a method of floating new issues by inviting subscriptions from the public through issue of
prospectus. " It is one of the most popular methods of raising funds by public companies. " The issue may be underwritten
& has to be listed with one stock exchange.
2. Offer for sale: It is a method in which the securities are not issued directly to the public but through intermediaries like
issuing houses or stock brokers. " The company sells securities en-bloc at an agreed price to the brokers who in turn resell
them to the investing public.
3. Private placement: It refers to the allotment of securities by a company to institutional investors and some selected
individuals. " It helps the company to raise capital more quickly than a public issue.
4. Rights issue: It is the right/privilege given to existing shareholders to subscribe to new issue to purchase new shares in proportion
to the number of shares they already hold.
5. e-1POs: These refer to issuing securities through the online system of stock exchange. " The company needs to appoint
SEBIregistered brokers for inviting applications, a registrar having electronic connectivity with the excharnge and a lead
manager to co-ordinate allthe activities amongst the intermediaries connected with the issue.

Objective Type Questions 10.1

1. This market helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise
spend to try and find each other. The market and the function being referred to are
(Fill in the blank witha correct answer)
2. 'Financial markets are classifiedon the basis of the maturity of financial instruments traded in them. The market inwhich
the instruments with more than one year maturity are traded is .(Fill in the blank with a correct answer)
3. MICO Automobiles Ltd' is engaged in manufacturing of auto parts for car manufacturing companies. The company enjoys
good creditworthiness. It nowwants to expand its business by investing in new plant and machinery. FOr this it requires
long terms finance. Arch,the Finance Manager of the company advised the CEO of the companyto raise funds by issuing
equity shares. It requires huge flotation cost the company decided to tap the money market. The money market instrument
the company can use for meeting the flotation cost is (Fill in the blank with a correct answer)
4. Instruments with a maturity period of less than one year are traded in the (Choose the correct alternative)
(a) capital market (b) money market
(c) Bombay Stock Exchange (BSE) (d) National Stock Exchange (NSE)
5. Which of the following is not a participant in the money market? (Choose the correct alternative)
(a) RBI (b) SEBI
(c) Mutual funds (d) NBFCs
 66 SUBHASH DEY (Shree Radhey Publications) Business Studies XII Part-B 2024-25 Edition

the correct alternative

instruments is also known as a zero coupon bond? (Choose
6. Which of the following mnoney market (b) Commercial paper
(a) Treasury bills (d) Certificate of Deposits.
(c) Call money and in multiples thereof.
7. Treasury bills are available for a minimum amount of (Choose the correct alternative)
(b) 15,000
(a) 710,000 (d) 25,000
(c) 20,000
promissory note having a maturity period of
8. Commercial paper is ashort-term unsecured (Choose the correct alternative)
(b) 15 days to one year
(a) 91 days to one year
(c) one day to 15 days (d) one year.
issued by RBI on behalf of Indian government. (Choose the correct alternative)
9. It is an instrument of short term borrowing (b) Certificate of deposit
(a) Call money (d) Treasury bill.
(c) Commercial paper
(Choose the correct alternative)
10. Primary and secondary markets: (b) Complement each other
(a) Compete with each other
(c) Function independently (d) Control each other
approach2
to sell 500 of these shares. Which market should she
11. Naina has 1000 equity shares of a company. She wants
Give reason in support of your answer.
12. ldentify the method of flotation:
X Ltd. offered the entire new issue of shares to life insurance company.
13. ldentify the method of flotation:
every 5 shares held by him.
Sunil has 500 shares in Y Ltd. He received an offer to buy 1 share of Y Ltd. for
14. AB Ltd. has sold 1 lakh equity shares of 10 each at12 per share to a stock broker, who offered them to the public at 20
each. ldentify the method of flotation.
(Choose the correct alternative)
15. ATreasury Bill is basically:
(a) An instrument to borrow short-term funds (b) An instrument to borrow long-term funds
(c) An instrument of capital market (d) None of the above
performs
16. helps to link the savers and the investors by mobilising funds between them. In doing so it
(Fill up the blanks with correct answers)

17. There are two major alternative mechanisms through which allocation of funds can be done; via or

(Fill up the blanks with correct answers)

via
18. Banks and financial markets are competing intermediaries in the financial system. True/ False? Give reason.
19. The process by which allocation of funds is done is called (Fill in the blank with a correct answer)
is a market for the creation and exchange of financial assets. (Fillin the blank with acorrect answer)
20. A
True/ False? Give reason.
21. Financial markets have fixed geographical locations.
True/ False ? Give reason.
22. Financial transactions are in the form of creation of financial assets only.
(Fill in the blank with a correct answer)
23. The secondary market is also known as
24. In the financial market, the households are and business firms represent the demand. The interaction
between them helps to establish a price for the financial asset which is being traded(Fillininthat particular market.
the blank with acorrect answer)
(Choose the correct alternative)
25. One of the functions of financial markets is providing liquidity to financial assets."
Identify the type of financial market highlighted above:
(a) Capital Market
(b) Money Market
(c) Primary market
(d) Secondary market
them. True/ False? Give reason.
26. Financial markets are classified on the basis of the maturity of financial instruments traded in
is a market for short-term finds which deals in monetary assets whose period of maturity is up to one
27. (Fillin the blank with a correct answer)
year.
substitutes for money. (True/False)
28. The money market deals in monetary assets, which are close
 Chapter 10: Financial Markets SUBHASH DEY (Shree Radhey Publications) 67

29 is a market where short-term debt instruments that are highly liquid are issued and actively traded
everyday. (Choose the correct alternative)
(a) Money Market
(b) Capital Market
(c) New Issues Market
(d) Stock Market
30. The money market has no physical location." True/ False ? Give reason.
31. enables the raising of short-term funds for meeting the temporary shortages of cash and obligations
and the temporary deployment of excess funds for earning returns. (Choose the correct alternative)
(a) Capital Market
(b) Money Market
(c) Primary Market
(d) Secondary Market
32. The major participants in the money market are (Complete the sentence)
33. is an instrument of short-term borrowing by the Government of India maturing in less than one year.
(Choose the correct alternative)
(a) Treasury Bill (b) Commercial Bill
(c) Commercial Paper (d) Certificate of Deposit
34. Treasury bills are also known as issued by the on behalf of the Central
Government to meet its short-term regquirement of funds. (Fill up the blanks with correct answers)
35. Treasury bills are also known as Zero Coupon Bonds since (Complete the sentence)
36. Treasury bills are availables for a minimum amount of and in multiples there of.
(Fill in the blank with a correct answer)
37. is a short-term unsecured promissory not, negotiable and transferable by endorsement and delivery
with a fixed maturity period of issued by large and creditworthy companies to raise short-term funds
at lower rates of interest than market rates. (Fillup the blanks with correct answers)
38. The issuance of is an alternative to bank borrowing for large companies that are generally considered
to be financially strong. (Choose the correct alternative)
(a) Treasury Bill (b) Commercial Paper
(c) Commercial Bill (d) Certificate of Deposit
39. The original purpose of commercial paper was (Complete the sentence)
40. is sold at adiscount and redeemed at par. (Choose the correct alternative)
(a) Treasury Bill (b) Commercial Paper
(c) Both (a) and (b) (d) Commercial Bill
41. Funds raised through commercialpaper are used tomeet the flotation costs. This is known as
(Fillin the blank with a correct answer)
42. isshort-term finance repayable on demand, with maturity period of used for inter-bank
transactions. It is a method by which banks borrow from each other to be able to maintain the cash reserve ratio.
(Fill up the blanks with correct answers)
43. The interest rate paid on call money loans is known as the (Choose the correct alternative)
(a) Lending rate (b) Call rate
(c) Repo rate (c) Bank rate
44. The interest rate paid on call money loans (known as 'call rate') is a highly volatile rate. True/False ? Give reason.
45. There is an relationship between call rates and other short-term money market instruments such as certificates
of deposit and commercial paper. (direct/inverse) (Fill in the blank with correct option)
46. There is an inverse relationship between call money rates and other short-term moneymarket instruments.
True/False?Give reason.
47 is unsecured, negotiable, short-term instrument in bearer form, issued by commercial banks and development
financial institutions. It helps to mobile alarge amount of money for short periods. (Choose the correct alternative)
(a) Treasury Bill
(b) Commercial paper
(c) Certificate of Deposit
(d) Commercial Bill
 2024-25 Edition
Business Studies XII Part-B
68 SUBHASH DEY (Shree Radhey Publications)
companies during periods of
to individuals, corporations and (Choose the correct alternative)
48. Certificates of Deposit can be issued
(a) Bulish phase of business cycle
(b) Bearish phase of business cycle for credit is high.
growth of banks is slow but the demand
(c) Tight liquidity when the deposit
(d) Growth of business opportunities When atrade bill is accepted bv
discounted with a bank if the seller needs funds before the bill matures.
49. Trade bills can be (Eill in the blank with a correct answer)
a
a commercial bank it is known as future. The seller could
becomes liable to make payment on a specificdate in
credit, the buyer bill and the buver
50. When goods are sold an
bill of exchange. The seller (drawer) of the goods drawn the
wait till the specified date or make use of called a trade bill. (trade bil/
being accepted, the bill becomes a marketable instruments and is
(drawer) accepts it. On
commercial bill)
the working capital requirements of business firms.
51. A is a billof exchange used to finance (Fill in the blank with a correct answer)
is used to finance the credit sales of
is a short-termn negotiable, self-liquidating instruments which(Fill in the blank with a correct answer)
52. A
firms. which long-term funds, both debt
refers to facilities and institutional arrangements through (Fillin the blank with acorrect answer)
53. The term
and equity are raised and invested. available for
which savings of the community are made
54. The consists of a series of channels through into their most-productive use
in general. It directs these savings
industrialand commercial enterprises and for the public
leading to growth and development of the economy. (Fill in the blank with a correct answer)
55. The participants in the capitalmarket are commercial
instruments traded in the capital market are short-term debt instruments such as Treasury bills,
56. The main True/False? Give reason.
paper, certificate of deposit, etc. True/False? Give reason.
huge financial outlay.
57. Investment in the capital market-securities requires a True/False ?Give reason.
of money.
58. In the money market, transactions entail huge sums debentures.
egquity shares and
deals in medium and long-term securities such as
for a single day. (Money market/Capital
59. The
even be issued
instruments have a maximum tenure of one year, and may (Fill in the blank with a correct answer)
market) True/False? Give reason.
60. Capital market securities are considered less liquid investments. True/False? Give reason.
than capital market securities.
61. Money market instruments enjoy a higher degree of liquidity True/False? Give reason.
principal repayment.
62. Capital market instruments are riskier both with respect to returns and due to the
much safer with a minimum risk of default. This is
63. The money market instruments are generally (Complete the sentence)
is higher if securities are held for a
64. In the capital markets, the possibility of earnings returns (Fillin the blank with a correct answer)
(Shortest/ longer) duration.
investors than the money markets.
65. The investments in capítal markets generally yield a higher return for True/False? Give reason.
(Fill in the blank with a correct answer)
66. The primary market is also known as True/False? Give reason.
Market.
67. The primary market is also known as the New Issues
68. The essential function of a is to facilitate the transfer of investible funds from savers to entrepreneurs
issues of securities for the first time.
seeking to establish new enterprises or to expand existing ones through the
(a) Capital market
(b) Money market
(c) Primary market
(d) Secondary market (Complete the sentence)
69. The investors in the primary market are (Complete the sentence)
primary market in the form of
70. A company can raise capitalthrough the (Complete the sentence)
71. Funds raised in the primary market may be for
 Chapter 10: Financial Markets SUBHASH DEY (Shree Radhey Publications) 69
72. Match the following:
(a) The most popular method of raising funds by public companies in the() Right Issue
primary market.
(b) Acompany sells securities en-bloc at an agreed price to brokers who, in (ii) Offer through prospectus
turn, resell them to the investing public.
(c) Allotment of securities by a company to institutional investors and some (ii) Offer for sale
selected individuals.
(d) The shareholders are offered a privilege to buy new shares in proportion (iv) Private
tothe number of shares the already posses.
placement

73. Under this method, securities are not issued directly to the public but are offered for sale through intermediaries like
issuing houses or stock brokers. (Choose the correct alternative)
(a) e-IPOs
(b) Private placement
(c) Rights Issue
(d) Offer for sale
74. Private placement help to raise capital more quickly than a public issue. (True/False)
75. Some companies cannot afford a public issue and choose to use private placement. True/False? Give reason.
76
is a privilege given to existing shareholders tosubscribe to a new issue of shares according to the
terms and conditions of the company. (Fillin the blank with a correct answer)
77. Acompany proposing to issue capitalto the public through the on-line system of the stockexchange has to enter into
an agreement with the stock exchange. This is called (Fill in the blank with a correct answer)
78. Under e-lPO method of fluatation, have to be appointed for the purpose of accepting applications and
placing orders with the company. (Fill in the blank with a correct answer)
79. Under e-IPO method of floating new issues in the primary market, the issues company should appoint a
tothe issue having electronics connectivity with the stock exchange. (Fill in the blank witha correct answer)
80. It is a market for the purchase and sale of existing securities. (Choose the correct alternative)
(a) Capital market
(b) Stock market
(c) Both (a) and (b)
(d) Capital market
81. helps existing investors to disinvest and fresh investors to enter the market.
(Fill in the blank with acorrect answer)
82. contributes to economic growth by channelising funds towards the most productivity investments
through the process of disinvestment and reinvestment. (Fill in the blank with a correct answer)
83. In the
only buying of securities takes place; securities cannot be soldthere. (Primary market/secondary
market) (Fillin the blank with a correct answer)
84. In prices are determined by demand and supply for the security. (Fill in the blank with a correct
answer)
85. There is no fixed geographical location of (Choose the correct alternative)
(a) Money market
(b) Capital market
(c) primary market
(d) Both (a) and (c)
86. The primary market directly promotes capital formation, whereas the secondary market indirectly promotes capital
formation. True/False? Give reason.
87. In the securities are sold by the company to the investor directly or through an intermediary.
(primary market/secondary market). (Fill in the blank with a correct answer)
88. A is located at specified places. (Fillin the blank with acorrect answer)
 Business Studies XII Part-B2024-25 Edition
70 sUBHASH DEY (Shree Radhey Publications)

Case Studies I0.I

Analysing, Evaluating & Creating Type Questions
Ltd.' and Rajesh Puri, the Finance Manager were
Q.1 Aditya Khosla, the Managing Director of D.L.W. that
of the company. Aditya Khosa was of the opinion
discussing the avenues of investing the idle fundswhereas feels that
Rajesh Puri, being more conservative,
money should be invested in the capital market
it would be better if the investment was made in money market.
Director convinced Rajesh that they should take
Since the economy was buoyant, the Managing get good returns. Ultimately it was decided to invest
advantage of it and invest in the capital market to
the idle funds in the capital market.
(a) What kind of instruments should the company buy?
return in a buoyant economy? State the reason.
(b) Why is the capital market expected to give a better (4 marks)
to money market?
(c) Why and how safe are the securities in this market as compared
Ans. (a) Shares, debentures, bonds
(b) Capital market is expected to give a better return in a buoyant economy as:
(i) The securities are held for a longer duration
(ii) There is a scope of carning capital gains on shares. company
(c) Securities in capital market are riskier with respect to return and principal repayment. Issuing
may fail to pertorm as promoters may defraud investors.
to link the savers
Q.2 Financial market is a market for creation and exchange of financial assets. It helps
with the investors and directs available funds into their most productive investment opportunity. It also
exchange
facilitates easy purchase and sale of financial assets through the stock exchange. The stock
securities but also educates public about how their
not only facilitates buying and selling of existing
investments in the financial market can yield good returns.
(a) State two functions performed by financial market in the above case.
(b) Explain four more functions of the stock exchange, other than those stated in the above case. (6 marks)
Ans. (a) Functions performed by Financial market:
(i) Irmobilises savings and channelises them into most productive use.
(i) It provides liquidity to financial assets by facilitating casy purchase and sale of securities through stock
exchanges.
(b) Functions of stock exchange, other than those stated in the above case:
(i) Pricing of securities
(ii) Ensures safety of transactions
(iii) Contributes to economic growth
(iv) Provides scope for speculation(explain these functions)
Q.3 India's largest domestic investor Life Insurance Corporation of India has once again come to governments
rescue by subscribing 70% of Hindustan Aeronautics 4,200-crore initial public offering.
(a) Which market is being reflected in the above case?
(b) State which method of flotation in the above identified market is being highlighted in the case?
(c) Explain any three other methods of flotation. (5 marks)
Ans. (a) Primary Market (New Issues Marker)
(b) e-IPOs: It refers to issue of capital to the public through the on-line system of the stock exchange.
(c) Other methods of floating new issues in the primary market: (Esplain)
(i) Private Placement (ii) Offer through prospectus (iii) Offer for sale
Q.4 With the explosive growth of its subscriber base, to fuel its expansion plan AiroTelecom Co. Ltd. wants
to raise 500 crore by issuing equity shares.
(a) Identify and state the market Airo Telecom Co. Ltd. will look to raise funds worth500crore to fuel
its expansion plan. Give reason in support of your answer.
(b) Explain any four methods through which Airo Telecom Co. Ltd. can issue equity shares. (6 marks)
 Chapter 10: Financial Markets sUBHASH DEY (Shree Radhey Publications) 71

Ans. (a) Primary market

Primary market is a ype of capital market in which new securities are issued by the companies. Since
Airo Telecom Co. Ltd. wantsto raise 500 crore by issuing newcquity shares, it will look tor the primary
market.
(b) Methods through which Airo Telecom Co. Lrd. can issue equity shares are: (Explain any four)
(i) Offer through prospectus
(ii) Offer for sales
(iii) Private placement
(iv) Rights issue
(v) e-IPOs
Q5 Saqib Ltd. is a large credit worchy company operating in the Kashmir Valley. It is an cxport oriented
unit, dealing in exclusive embroidered shawls. The floods in the Valley have created many problems for
the company. Many crafsmen and workers have been dislocated and raw material has been destroyed.
The firm is therefore, unable to get an uninterrupted supply of raw material, and the duration of the
production cycde has also increased. To add to the problems of the organisation, the suppliers of raw
material who were earlier selling on credit are asking the company, for advance payment or cash payment
on delivery. The company is facing a liquidity crisis. The CE0 of the company feels that taking a bank
loan is the only option with the company tomeet its short term shortage of cash.
As the finance manager of the company name and explain the alternative to bank borrowing that the
company can use to resolve the crisis. (3 marks)
Ans. Commercial Paper: (Explain)
Q.6 Sika Ltd., a reputed industrial machines manufacturer, needs Rupees twenty crore as additional capital
to expand the business. Mr. Amit Joshi, the chief Executive Oficer (CEO) of the company wants to raise
funds through equity. The finance Manager, Mr. Narender Singh, suggested that the shares may be sold to
investing public through intermediaries, as the same will be less expensive.
Name the method through which the company decided to raise additional capital. (1 mark)
Ans. Offer for Sale.
Q.7 An investor wanted to invest 20,000 in Treasury Bills for a period of 91 days. When he approached the
Reserve Bank of India for this purpose he came to know that it was not possible.
Identify the reason why the investor could not invest in the Treasury Bill. (1 mark)
Ans. The investor could not invest in the Treasury Bills as they can be issued for a minimum amount of }25,000
and its muliples thereof.
Q.8 Varunica Ltd., a reputed truck manufacturing company, needs rupees twenty crore as additional capital to
expand its business. M. Alind Jindal, the CEO of the company, wants to raise funds through equity. The
Finance Manager, Mr. Nikhil Sachdeva, suggests that the existing shareholders be offered the privilege to
subscribe to new issue of shares as per the terms and conditions of the company which was agreed by Mr.
Alind Jindal. Name the method through which the company decided to raise additional capital.
(1 mark)
Ans. Rights Issue
Q.9 Shreya Ltd. is a large credit-worthy company manufacturing automobiles for the lndian market .t now
wants to cater to theother market and decided to invest in new machines. For this, it requires long-term
finance. It decides to raise funds by issuing equity shares. The isue of equity shares involves a huge
Aotation cost. To meet the expenses of the flotation cost the company decides to tap the money market.
(a) Name and discuss the money market instrument the company can use for the above purpose.
(b) What is the duration for which the company can get funds through this instrumen?
(c) State any other purpose for which this instrument can be used. (4 marks)
Ans. (a) Commercial paper it is a short term unsecured promissory note, negotiable and transferable by
endorsement and delivery with a fixed maturity period.
(b) 15 days to one year.
(c) It is used to provide short term funds for seasonal and working capital needs of the business.
72 SUBHASH DEY (Shree Radhey Publications) Business Studies XIIPart-B 2024-25 Edition

210 Meca Ltd. a reputed automobile manufacturer needs Rupees ten crorc as additional capital to expand its
business. Atul Jalan, the CEOof the company wanted to raise funds through equity. On the other hand
the Finance Manager, Nimi Sahdev said that the public issue may be expensive on account of various
mandatory and non-mandatory expenses. Therefore, it was decided to allot the securities to institutional
investors.
Name the method through which the company decided to raise additional capital. (1 mark)
Ans. Private Placement.
Q.11 Vani Oil Refinery' is a large company, engaged in processing crude oil and refining it into more useful
products like Petroleum, Kerosene, LPG etc. It has built a good reputation over the years. It has been
consistently carning profits and paying regular dividend to its shareholders. It needs additional working
capital immediately to finance a project. It expects to return this amount after seven to eight months.
Ashish Batra, the Finance Manager of the company does not want to get into procedural requirements of
securing finance from a Commercial Bank.
Suggest how the company can raise the required finance for meeting its additional working capital
requirements. (1 mark)
Ans. Vani Oil Refinery can raise the required finance for meeting its additional working capital requirements
through Commercial Paper.
Q.13 The directors of acompany want to modernise itsplant and machinery by making a public issue of shares.
They wish to approach thestock exchange, while the finance manager prefers to approach a consultant
for the new public issue of shares. Advise the directors whether to approach the stock exchange or a
consultant for new publicissue of shares and why. Also advise them about different methods which the
company may adopt for the new public issue of share. (6 marks)
Ans. The directors should approach a consultant for new public issue of shares. The stock exchanges deal with sale
and purchase of existing securities only, not in new issue of securities.
Different methods which thecompany may adopt for the new public issue of shares:
(i) Ofer through prospectus (ii) Offer for sale
(iii) Private placement (iv) Rights issue
(v) e-IPOs. (explain)
Q.14 These days, the development of a country is also judged by its system of transferring finance from the
sector where it is in surplusto the sector where it is needed most. To give strength to the economny, SEBI is
undertaking measures to develop the capital market. In additionto this there is another market in which
unsecured and short-term debt instruments are actively traded everyday. These markets together help the
savers and investors in directing the available funds into their most productive investment opportunity.
(a) Name the function being performed by the market in the above case
(b) Also, explain briefly three other functions performed by this market. (4 marks)
Ans. Mobilisation of savings and channeling them into the most productive uses/Allocative function.
Other functions performed by Financial market are:
(i) Facili tating price determination/discovery.
(ii) Providing liquidity to financial assets.
(iii) Reducing the cost of transactions.