Hello Students. Are you Searching for Class 12 Business Studies NCERT Solutions of Chapter 10? If yes then you are in the right place. Here we have provided you with the Question and Answers of Chapter 10: Financial Markets. These solutions are written by expert teachers and are so accurate to rely on. These solutions can eliminate any lingering doubts you may have regarding the concepts.
| Chapter | 10. Financial Markets |
| Subject | Business Studies |
| Class | Twelve |
| Category | NCERT Solutions for Class 12 |
NCERT Solutions for Class 12 Business Studies can be a great tool for the students who have taken Business Studies stream for higher studies. These NCERT Class 12 Business Studies solutions are written by expert teachers and faculties to make your practice and revision easier. On this page, we have provided you with the complete solutions of Chapter 10: Financial Markets.
NCERT Solutions for Class 12 Business Studies Chapter 10
Financial Markets
Multiple Choice questions
Q1) Primary and secondary markets
(a) Compete with each other
(b) Complement each other
(c) Function independently
(d) Control each other
Q2) The total number of Stock Exchange in India is
(a) 20
(b) 21
(c) 22
(d) 23
Answer) (d) 23
Q3) The settlement cycle in NSE is
(a) T+5
(b) T+3
(c) T+2
(d) T+1
Answer) (c) T+2
Q4) The National Stock Exchange of India was recognized as stock exchange in the year
(a) 1992
(b) 1993
(c) 1994
(d) 1995
Answer) (a) 1992
Q5) NSE commenced futures trading in the year
(a) 1999
(b) 2000
(c) 2001
(d) 2002
Answer) (b) 2000
Q6) Clearing and settlement operations of NSE are carried out by
(a) NSDL
(b) NSCCL
(c) SBI
(d) CDSL
Answer) (b) NSCCL
Q7) A Treasury 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
Answer) (a) An instrument to borrow short-term funds
Short Answer Questions
Q1) What are the functions of a financial market?
Answer) A financial market refers to the market where the creation and exchange of financial assets such as shares and debentures takes place. The following are the functions of a financial market.
- Transfer of Savings and Alternatives for Investment: A financial market acts a link between the savers and the investors. It provides a platform for the transfer of savings from the households to the investors. It also provides savers with various alternatives for investment and thereby, directs the funds to the most productive investment.
- Establishes the Price: Similar to a commodity, the price of a financial asset is established through the forces of demand and supply for funds. Financial market provides a platform for the interaction of the demand of the funds (represented by the business firms) and the supply of funds (represented by the households). Thereby, it helps in determining the price of the asset being traded.
- Facilitates Liquidity: An asset or a security can be easily purchased and sold in a financial market. This renders liquidity to the assets. That is, through trading in the financial market assets can be easily converted into cash or cash equivalents.
- Reduced Cost of Transaction: By rendering information regarding the securities being traded, their price, availability, etc., a financial market helps in reducing the cost of transaction in terms of effort, money and time.
Q2) ”Money Market is essentially a Market for short term funds”. Discuss.
Answer) Money market refers to the market for trading of short term securities and funds. Securities traded in the money market have a very short maturity period ranging from one day to one year. Such assets act as a close substitute for cash or money. Due to their short maturity period they are also known as ‘Near Money instruments’. Money market instruments act as an important source of finance for working capital requirements. They enjoy a high degree of liquidity. DFHI discounts money market securities and offers a ready market for them. In addition, securities traded in the money market are safe and secure as the transactions are made in those instruments that are issued by financial institutions and those companies that are financially strong. Common instruments traded in the money market are treasury bills, commercial paper, call money, certificate of deposit, etc.
Q3) What is a Treasury Bill?
Answer) Treasury Bill is a short term promissory note issued by the Reserve Bank of India on behalf of the Central Government of India. They are issued to fulfil the short-term fund requirements of the Government of India. Maturity period of Treasury Bills ranges from 14 days to 364 days. Generally, these bills are brought by commercial banks, LIC, UTI, non-baking financial companies, etc. They are also called Zero-Coupon Bonds. Treasury bills are highly liquid instruments because of the fact that the RBI is always ready to purchase these bills. Moreover, they are also considered to be the safest instrument as they are issued by the RBI. They are available for a minimum amount of Rs 25,000 and in multiples thereof. Treasury Bills are issued at a discount i.e. they are issued at a price which is lower than the face value and are redeemed at par. Herein, the discount (the difference between the price of issue and the redemption value) is the interest received at the time of redemption.
Q4) Distinguish between Capital Market and Money Market.
Answer) The following points highlight the difference between Capital Market and Money Market.
| Comparison | Capital Market | Money Market |
|---|---|---|
| Time Span | Capital market is one part of the financial market in which borrowing and lending is of medium and long term. | Money market is that part of financial market where borrowing and lending is of short term. |
| Liquidity | Capital market instruments are less liquid | Money market instruments are highly liquid. |
| Returns Expected | Higher returns as investment is for longer duration | Low returns as investment is of short duration |
| Instruments | Capital market deals in instruments such as debentures, shares, preference shares and bonds etc. | Money markets deal in instruments such as bills of exchange, T-bill, promissory notes and call money etc. |
| Risk | As the instruments are less liquid in nature and long maturity | Money market securities are less risky due to short time period and sound financial position of the issuers. |
Q4) What are the functions of a Stock Exchange?
Answer) The functions of a stock exchange are as follows:
- It provides a platform for trading of securities. A stock exchange offers easy conversion of securities to cash and also conversion of securities
- It helps in establishing price for the assets of monetary nature which are traded. It is a common place for buyer and seller interactions and prices of securities are determined based on supply and demand.
- There is safety and regulations in a stock market. Trade is conducted within a defined legal framework which ensures fairness in transactions.
- In a stock market there is continuous buying and selling of stocks which helps in enhancing capital formation and supports economic growth.
- As share prices keep changing, it indicates the corresponding changes in economic conditions, an economic recession will see share prices fall while a boom in the market will contribute to price increase.
Q5) What are the objectives of the SEBI?
Answer) Securities and Exchange Board of India (SEBI) was established for promoting an orderly and healthy growth of the securities market in India. The following points highlight the overall objectives of SEBI.
- Regulation: The basic objective of SEBI is to regulate the functioning of stock exchange and the securities market. It aims at providing a place where the issuers of securities (i.e. companies) can raise funds in an easy and confident manner.
- Protection: SEBI works on educating the investors and provide guidelines related to investment. It provides them adequate and reliable information about the companies and thereby, helps them in taking wise and informed investment decisions.
- Prevention: To combat the malpractice in trading of securities was the basic reason for the establishment of SEBI. Malpractice such as insider trading, violation of rules and regulations, non-adherence to Companies Act, etc. erodes the confidence of investors. SEBI aims at checking these malpractice by creating a balance between the self regulation of a business and the legal statutory regulations.
- Code of Conduct: Through regulation, SEBI develops a code of conduct for the fair trade practices by the intermediaries such as brokers, merchant bankers, underwriters, etc. SEBI controls the activities of these intermediaries and provides them a professional and competitive environment.
Q6) State the objectives of the NSE.
Answer) The following are the objectives of NSE or National Stock Exchange
- It was aimed at setting up a national trading facility which deals with all types of securities. This system increases the confidence of the investors.
- It provided an easy and equal access through a communication network which increased the liquidity of the securities.
- It was looking to provide transparency and fairness in securities dealing by using electronic trading system.
- It enabled faster settlements by having shorter settlement cycles.
- It was looking to fulfill the benchmarks and international standards of stock exchange.
Q7) Name the document prepared in the process of online trading of securities that is legally enforceable and helps to settle disputes/claims between the investor and the broker
Answer) Once the trade is conducted, the broker issues a Contract Note. The contract note contains number of shares that are sold and brought, price, date and time of the deal and the brokerage charges. It is an important document as it has legal validity and can be submitted as a proof during claim settlement or disputes which can arise between broker and the investor. The contract note contains the unique order code number that is assigned by stock exchange for each transaction.
Long Answer Questions
Q1) Explain the various Money Market Instruments.
Answer) Money market is the market of trading for short term instruments. The instruments traded in money market have a maturity period of maximum one year.
1. Treasury Bills
Treasury bills are one type short term money market instrument which is used in the form of a promissory note that is used for borrowing by the government. It is one of the most commonly used money market instruments. It is auctioned by RBI on behalf of the central government. T-bills have a minimum unit of Rs 25,000 and in multiples. Three types of treasury bills are present which are of variable duration of 91, 182 and 364 days. T-bills get issued at discount and are redeemed at par. It is also known as zero coupon bonds and as it is issued by RBI, there is very negligible risk and returns are assured.
2. Commercial Paper or CP
Commercial papers are one of the short-term instruments of money market that are unsecured. It is a type of promissory note that is transferrable and negotiable with maturity periods of maximum one year. These instruments were used by companies having creditworthiness in the market for raising short term funds. These are used as alternatives to borrowings from capital market or banks and offer interest lower than market. Commercial papers are used mainly for bridge financing.
3. Call money
Call money is an instrument used for interbank transactions. Through call money, the banks borrow from each other to meet any shortage of funds required to maintain CRR. That is, any bank in shortage of funds borrows from other bank having surplus funds. Call money have a very short maturity period ranging from one day to fifteen days. Interest paid on such loans is known as call rate. Call rate is highly volatile and varies from day to day. There exists a negative relationship between call rate and other money market instruments such as Commercial Papers and Certificate of Deposits. That is, as the call rate rise, other instruments of money market become cheaper and their demand increases.
4. Certificate of Deposit
Certificate of deposits are those money market instruments which are time deposits and are unsecured and negotiable in nature. These have a maturity period of maximum 5 years. Commercial bills are issued to individuals, companies and corporations by the commercial banks and other financial institutions. Higher deposits have higher interests. At times of tight liquidity situation these instruments are used to strengthen the credit.
5. Commercial Bill
Commercial bill also known as bank bill or bill of exchange refers to the instrument used to finance the working capital requirements of a firm. It is a short term negotiable instrument. Companies use Commercial Bills to finance their credit sales. For example, when an individual makes credit sales, the buyer becomes liable to make the payment on a specified future date. Herein, the seller draws a bill of exchange and gives it to the buyer mentioning a specific maturity period. Once the bill is accepted by the buyer it becomes a marketable instrument which can be discounted with a bank. For instance, if the seller requires funds before the maturity period, he can discount the bill with a commercial bank.
Q2) What are the methods of floatation in Primary Market?
Answer) The following are the various methods through which floating of new issues can be done.
1. Offer through Prospectus
The most commonly used method for raising funds in primary market is offer through prospectus. It involves inviting the subscriptions from public by issue of prospectus. A prospectus is published as advertisements in newspapers, magazines, etc. It provides such information as the purpose for which the fund is being raised, company’s background and future prospects, its past financial performance, etc. Such information helps the public and the investors to know about the company as well as the potential risk and the earnings involved. Such issues need to be listed on one of the stock exchanges and should be in accordance with the guidelines and rules listed under the Companies Act and SEBI disclosure.
2. Offer through Sale
As against offer through prospectus, under the offer through sale method, the company does not issue securities directly to the public rather they are issued through intermediaries such as brokers, issuing houses, etc. That is, under offer through sale, securities are issued in two steps, first the company sells its securities to the intermediaries at the face value and later the intermediaries resell the securities to the investing public at a higher price than the face value to earn profit.
3. Private Placement
Under this method, the securities are sold only to some selected individuals and big institutional investors rather than to the public. The companies either allot the securities themselves or they sell the securities to intermediaries who in turn sell them to selected clients. This method saves the company from various mandatory or non-mandatory expenses such as cost of manager fees, commission, underwriter fees, etc. Thus, the companies which cannot afford the huge expenses related to public issue often go for private placement.
4. Rights Issue
Under the Companies Act 1956, it is the right of the existing share holders of a company to subscribe to the new shares issued by it. The existing share holders are offered subscription of new shares of the company in proportion to the number of shares possessed by them.
5. e-IPOs
It is system of issuing securities through online system. If a company decides to offer its securities through an online system it is required to gets into an agreement with the stock exchange. This is called Initial Public Offer (IPO). Company appoints brokers for accepting applications and placing orders. A company can apply to get listed in any stock market except from the one through which it has already offered securities. Herein, the lead manager looks upon the various activities and coordinates them.
Q3) Explain the recent Capital Market reforms in India.
Answer) A capital market refers to the market that deals in the trading of medium and long-term securities. That is, it deals in those securities that have a maturity period of greater than or equal to one year. Capital market comprises of instruments such as equity and preference shares, debentures, bonds, mutual funds, public deposits, etc. A capital market can be divided in two parts namely, Primary Market and Secondary Market. Primary market deals with issue of new securities. Issue of new securities in the primary market directs funds towards those entrepreneurs who either want to start a new enterprise or wish to expand the existing one. Secondary market, on the other hand, deals in the sale and purchase of the existing securities. That is, it deals in the trading of those securities that were initially issued in the primary market.
The history of capital market in the form of stock exchange dates back to the eighteenth century. The Government of India introduced the Companies Act in 1850 with the aim of generating investor interest in corporate securities. The first stock exchange was set up in India in the year 1875 as ‘The Native Share and Stock Brokers Association’ in Bombay. Later it was renamed as ‘Bombay Stock Exchange’ (BSE). In the subsequent years stock exchanges were developed in Ahemdabad, Calcutta and Madras.
In 1990s, the Indian secondary market only consisted of regional stock exchanges wherein, first being the BSE. However, after the reforms of 1991, the Indian Stock Market acquired a three-tier system. This consisted of Regional Stock Exchanges, National Stock Exchange and Over the Counter Exchange of India (OTCEI).
Regional Stock Exchange
The first Regional Stock Exchange was developed in Ahemdabad as Ahmedabad Stock Exchange (ASE) in 1894. Similarly, in 1908, Calcutta Stock Exchange (CSE) was established. Subsequently in the later years other regional stock exchanges were established in Calcutta, Madras, Ahemdabad, Delhi, Hyderabad and Indore. Recently, regional stock exchanges were developed in Coimbatore as Coimbatore Stock Exchange and in Meerut as Meerut Stock Exchange. Currently, there are 22 regional stock exchanges in India.
National Stock Exchange
The NSE is the latest technology driven stock exchange which was recognised in 1993. It started its operations in 1994 with trading in money market securities. Later, it also expanded its trading operations in capital market segment. NSE was set up in order to establish a nationwide platform for trading in all types of securities. It ensured development of fair and efficient securities market. Within the span of its existence, NSE has transformed the Indian capital market and has been able to take the stock market to the investor’s door step. It has provided a wide screen-based automated trading system across the nation ensuring equal access to all the investors.
Over the Counter Exchange of India (OTCEI)
OTCEI is a company which was set up in 1990 under the Companies Act,1956 but later was recognised as a stock exchange under the Securities Contracts Regulation Act, 1956. It commenced its operations in trading in 1992 and is modelled along the lines of NASDAQ, the OTC exchange in USA. It aims at providing the small companies an easy access to the capital market. OTCEI provides a screen based nationwide trading system, that acts as a place where buyers meet the sellers and negotiate for an acceptable terms of trade. Herein, dealers can trade both in new issue of securities as well as secondary market. It is a single window exchange which provides a convenient, transparent and efficient avenue for capital market investment.
Q4) Explain the objectives and functions of the SEBI.
Answer) The Securities and Exchange Board of India was established in 1988 in order to encourage an orderly and healthy growth of the securities market. SEBI was set with an overall objective of investor protection and to promote the development and regulation of the functions of the securities market. The following are the listed objectives.
- Regulation: The main objective of SEBI was to regulate the functioning of the stock exchange and the securities market. It aims at providing a place where the issuers of securities (i.e. companies) can raise funds in an easy and confident manner.
- Protection: SEBI educates the investors by providing them valuable information regarding various securities and companies. It provides them with the guidelines related to efficient investment. It provides them adequate and reliable information about the companies and thereby, helps them in taking wise and informed investment decisions.
- Prevention: To combat the malpractice in trading of securities was the basic reason for the establishment of SEBI. Malpractice such as insider trading, violation of rules and regulations, non-adherence to Companies Act, etc. erodes the confidence of investors. SEBI aims at checking these malpractice by creating a balance between the self regulation of a business and the legal statutory regulations.
- Code of Conduct: Through efficient regulation, SEBI aims at developing a code of conduct for fair trade practices by intermediaries such as brokers, merchant bankers, underwriters, etc. This helps in making them competitive and professional.
To attain the aforementioned objectives, SEBI perform 3 main functions namely, Regulatory, Development and Protective functions. The following are the functions performed by SEBI.
- Regulatory Functions
- Registration: One of the regulatory functions performed by SEBI is the registration of the brokers, sub-brokers, agents and other players in the market. Registration of collective mutual schemes and Mutual Funds is also done by SEBI.
- Regulating the Work: SEBI regulates the working of the stock brokers, underwriters, merchant bankers and other market intermediaries. It frames rules and regulations for the working of the intermediaries. SEBI also regulates the takeover bids by the companies. It conducts regular enquires and audits of stock exchange and intermediaries.
- Regulation by Legislation: SEBI performs and exercise various other powers which are delegated by the Government of India under the Securities Contracts (Regulation) Act, 1956. Besides, it levies fee or other charges for carrying out the purposes of the Act.
- Development Functions
- Training: SEBI promotes the training and development of the intermediaries of the securities market in order to promote healthy growth of the securities market.
- Research: By conducting research in the required and important areas of the securities market, SEBI publishes useful information. This helps the investors and other market players to make wise investment decisions.
- Flexible Approach: SEBI has adopted a flexible and adaptive approach such permitting internet trading, IPOs, etc. Such measures promote the development of capital market.
- Protective Functions
- Prohibition: SEBI prohibits fraudulent and unfair trade practices. It prevents the spreading of misleading and manipulative statements which are likely to affect the working of the securities market. SEBI educates the investors by providing them valuable information regarding various securities and companies so as to enable them to make wise investment decisions.
- Checks on Insider Trading: Insider trading refers to a situation where an individual connected with the company leaks out crucial information regarding the company. Such information may adversely affect its share prices. SEBI keeps a strict check on such insider trading.
- Promotion and Protection: SEBI encourage fair trade practices and promotes a code of conduct for the intermediaries. It undertakes step for investor protection and education. It also checks the manipulation of price of securities.
Q5) Explain the various segments of the NSE.
Answer) The National Stock Exchange is the technology driven stock exchange which was incorporated in 1992. It was recognised as a stock exchange in 1993 and started operations in the year 1994. NSE provides trading in two main segments namely, Whole Sale Debt Market Segment and Capital Market Segment.
1. Whole Sale Debt Market Segment
This segment provides a platform for trading in fixed income securities such as state development loans, bonds issued by public sector undertaking, corporate debentures, commercial paper, mutual funds, central government securities, zero coupon bonds, treasury bills, etc. NSE started operations in Whole Sale Debt Market in June 1994. It is the first fully screen based system for trading in debt market. That is, it is the first computer based trading system. Trading in the debt market involves two parties- trading members (which are the recognised brokers of NSE) and the participants (i.e. the buyers and sellers of securities). The transactions among the participants are settled through members. For instance, the members place an order for the seller of a security which is then suitably matched by another member for buyer of a security wishing to purchase that security. An order remains in the system until it is suitably matched. This segment of NSE is also known as NEAT (National Exchange for Automated trading).
2. Capital Market Segment
Under this segment, NSE deals with trading in equity shares, preference shares, debentures, exchange traded funds as well as retail Government securities. It provides an efficient and transparent platform for a fair trading system. The capital market segment commenced its working in November 1995. The trading system of NSE Capital Market segment is also known as the National Exchange for Automated Trading − Capital Market (NEAT- CM). The trading operations of the Capital Market segment remain the same as in the Whole Sale Debt market system.
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