NCERT Textbook - Financial Market | Business Studies (BST) Class 12 - Commerce PDF Download

 Page 1


chapter 
10
Financial Markets senseX — t he BoMBay s tock 
e Xchange s ensitive i ndeX
Have you counted the number of 
times newspaper headlines in the past 
few weeks have been discussing the 
SENSEX? It goes up and down all the 
time and seems to be a very important 
part of business and economic news. 
Has that made you wonder what the 
SENSEX actually is?
 The SENSEX is the benchmark 
index of the BSE. Since the BSE has 
been the leading exchange of the 
Indian secondary market, the SENSEX 
has been an important indicator of 
the Indian stock market. It is the 
most frequently used indicator while 
reporting on the state of the market. 
An index has just one job: to capture 
the price movement. So a stock index 
will reflect the price movements of 
shares while a bond index captures the 
manner in which bond prices go up or 
down. If the SENSEX rises, it indicates 
the market is doing well. Since stocks 
are supposed to reflect what companies 
expect to earn in the future, a rising 
index indicates that investors expect 
better earnings from companies. It 
is also a measure of the state of the 
Indian economy. If Indian companies 
are expected to do well, obviously the 
economy should do well too. 
 The SENSEX, launched in 1986 
is made up of 30 of the most actively 
traded stocks in the market. In fact, 
they account for half the BSE’s market 
capitalisation. They represent 13 sectors 
of the economy and are leaders in their 
respective industries.
LEARNING OBJECTIVES
After studying this chapter, 
you should be able to:
 ¾ explain the meaning of 
Financial Market;
 ¾ explain the meaning of 
Money Market and describe 
its major Instruments;
 ¾ explain the nature and 
types of Capital Market;
 ¾ distinguish between 
Money Market and Capital 
Market;
 ¾ explain the meaning 
and functions of Stock 
Exchange;
 ¾ describe the functioning of 
NSEI and OTCEI; and
 ¾ describe the role of SEBI in 
investor protection.
Ch_10.indd   252 29-Dec-20   3:25:25 PM
2022-23
Page 2


chapter 
10
Financial Markets senseX — t he BoMBay s tock 
e Xchange s ensitive i ndeX
Have you counted the number of 
times newspaper headlines in the past 
few weeks have been discussing the 
SENSEX? It goes up and down all the 
time and seems to be a very important 
part of business and economic news. 
Has that made you wonder what the 
SENSEX actually is?
 The SENSEX is the benchmark 
index of the BSE. Since the BSE has 
been the leading exchange of the 
Indian secondary market, the SENSEX 
has been an important indicator of 
the Indian stock market. It is the 
most frequently used indicator while 
reporting on the state of the market. 
An index has just one job: to capture 
the price movement. So a stock index 
will reflect the price movements of 
shares while a bond index captures the 
manner in which bond prices go up or 
down. If the SENSEX rises, it indicates 
the market is doing well. Since stocks 
are supposed to reflect what companies 
expect to earn in the future, a rising 
index indicates that investors expect 
better earnings from companies. It 
is also a measure of the state of the 
Indian economy. If Indian companies 
are expected to do well, obviously the 
economy should do well too. 
 The SENSEX, launched in 1986 
is made up of 30 of the most actively 
traded stocks in the market. In fact, 
they account for half the BSE’s market 
capitalisation. They represent 13 sectors 
of the economy and are leaders in their 
respective industries.
LEARNING OBJECTIVES
After studying this chapter, 
you should be able to:
 ¾ explain the meaning of 
Financial Market;
 ¾ explain the meaning of 
Money Market and describe 
its major Instruments;
 ¾ explain the nature and 
types of Capital Market;
 ¾ distinguish between 
Money Market and Capital 
Market;
 ¾ explain the meaning 
and functions of Stock 
Exchange;
 ¾ describe the functioning of 
NSEI and OTCEI; and
 ¾ describe the role of SEBI in 
investor protection.
Ch_10.indd   252 29-Dec-20   3:25:25 PM
2022-23
FINANCIAL MARKETS
253
i ntroduction You all know that a business needs 
finance from the time an entrepreneur 
makes the decision to start it. It needs 
finance both for working capital 
requirements such as payments for raw 
materials and salaries to its employees, 
and fixed capital expenditure such as 
the purchase of machinery or building 
or to expand its production capacity. 
The above example gives a fair picture 
of how companies need to raise funds 
from the capital markets. Idea Cellular 
decided to enter the Indian capital 
market for its needs of expansion. In 
this chapter you will study concepts 
like private placement, Initial public 
Offer (IPO) and capital markets which 
you come across in the example of 
Idea Cellular. Business can raise 
these funds from various sources and 
in different ways through financial 
markets. This chapter provides a brief 
description of the mechanism through 
which finances are mobilised by a 
business organisation for both short 
term and long term requirements. It also 
explains the institutional structure and 
the regulatory measures for different 
financial markets.
c oncept oF Financial Market A business is a part of an economic 
system that consists of two main 
sectors – households which save 
funds and business firms which 
invest these funds. A financial market 
helps to link the savers and the 
investors by mobilizing funds between 
them. In doing so it performs what is 
known as an allocative function. It 
allocates or directs funds available for 
investment into their most productive 
investment opportunity. When the 
allocative function is performed well, 
two consequences follow:
• The rate of return offered to 
households would be higher
• Scarce resources are allocated to 
those firms which have the highest 
productivity for the economy.
There are two major alternative 
mechanisms through which allocation 
of funds can be done: via banks or 
via financial markets. Households 
can deposit their surplus funds with 
banks, who in turn could lend these 
funds to business firms. Alternately, 
households can buy the shares and 
debentures offered by a business 
using financial markets. The process 
by which allocation of funds is done is 
called financial intermediation. Banks 
and financial markets are competing 
intermediaries in the financial system, 
and give households a choice of where 
they want to place their savings. 
A financial market is a market 
for the creation and exchange of 
HOUSEHOLDS BUSINESS FIRMS
INVESTORS
SAVERS 
BANKS
 FINANCIAL MARKETS
Ch_10.indd   253 29-Dec-20   3:25:34 PM
2022-23
Page 3


chapter 
10
Financial Markets senseX — t he BoMBay s tock 
e Xchange s ensitive i ndeX
Have you counted the number of 
times newspaper headlines in the past 
few weeks have been discussing the 
SENSEX? It goes up and down all the 
time and seems to be a very important 
part of business and economic news. 
Has that made you wonder what the 
SENSEX actually is?
 The SENSEX is the benchmark 
index of the BSE. Since the BSE has 
been the leading exchange of the 
Indian secondary market, the SENSEX 
has been an important indicator of 
the Indian stock market. It is the 
most frequently used indicator while 
reporting on the state of the market. 
An index has just one job: to capture 
the price movement. So a stock index 
will reflect the price movements of 
shares while a bond index captures the 
manner in which bond prices go up or 
down. If the SENSEX rises, it indicates 
the market is doing well. Since stocks 
are supposed to reflect what companies 
expect to earn in the future, a rising 
index indicates that investors expect 
better earnings from companies. It 
is also a measure of the state of the 
Indian economy. If Indian companies 
are expected to do well, obviously the 
economy should do well too. 
 The SENSEX, launched in 1986 
is made up of 30 of the most actively 
traded stocks in the market. In fact, 
they account for half the BSE’s market 
capitalisation. They represent 13 sectors 
of the economy and are leaders in their 
respective industries.
LEARNING OBJECTIVES
After studying this chapter, 
you should be able to:
 ¾ explain the meaning of 
Financial Market;
 ¾ explain the meaning of 
Money Market and describe 
its major Instruments;
 ¾ explain the nature and 
types of Capital Market;
 ¾ distinguish between 
Money Market and Capital 
Market;
 ¾ explain the meaning 
and functions of Stock 
Exchange;
 ¾ describe the functioning of 
NSEI and OTCEI; and
 ¾ describe the role of SEBI in 
investor protection.
Ch_10.indd   252 29-Dec-20   3:25:25 PM
2022-23
FINANCIAL MARKETS
253
i ntroduction You all know that a business needs 
finance from the time an entrepreneur 
makes the decision to start it. It needs 
finance both for working capital 
requirements such as payments for raw 
materials and salaries to its employees, 
and fixed capital expenditure such as 
the purchase of machinery or building 
or to expand its production capacity. 
The above example gives a fair picture 
of how companies need to raise funds 
from the capital markets. Idea Cellular 
decided to enter the Indian capital 
market for its needs of expansion. In 
this chapter you will study concepts 
like private placement, Initial public 
Offer (IPO) and capital markets which 
you come across in the example of 
Idea Cellular. Business can raise 
these funds from various sources and 
in different ways through financial 
markets. This chapter provides a brief 
description of the mechanism through 
which finances are mobilised by a 
business organisation for both short 
term and long term requirements. It also 
explains the institutional structure and 
the regulatory measures for different 
financial markets.
c oncept oF Financial Market A business is a part of an economic 
system that consists of two main 
sectors – households which save 
funds and business firms which 
invest these funds. A financial market 
helps to link the savers and the 
investors by mobilizing funds between 
them. In doing so it performs what is 
known as an allocative function. It 
allocates or directs funds available for 
investment into their most productive 
investment opportunity. When the 
allocative function is performed well, 
two consequences follow:
• The rate of return offered to 
households would be higher
• Scarce resources are allocated to 
those firms which have the highest 
productivity for the economy.
There are two major alternative 
mechanisms through which allocation 
of funds can be done: via banks or 
via financial markets. Households 
can deposit their surplus funds with 
banks, who in turn could lend these 
funds to business firms. Alternately, 
households can buy the shares and 
debentures offered by a business 
using financial markets. The process 
by which allocation of funds is done is 
called financial intermediation. Banks 
and financial markets are competing 
intermediaries in the financial system, 
and give households a choice of where 
they want to place their savings. 
A financial market is a market 
for the creation and exchange of 
HOUSEHOLDS BUSINESS FIRMS
INVESTORS
SAVERS 
BANKS
 FINANCIAL MARKETS
Ch_10.indd   253 29-Dec-20   3:25:34 PM
2022-23
BUSINESS  STUDIES
254
financial assets. Financial markets 
exist wherever a financial transaction 
occurs. Financial transactions could 
be in the form of creation of financial 
assets such as the initial issue of 
shares and debentures by a firm or the 
purchase and sale of existing financial 
assets like equity shares, debentures 
and bonds.
Functions oF Financial Market Financial markets play an important 
role in the allocation of scarce resources 
in an economy by performing the 
following four important functions.
1. 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: You 
all know that the forces of demand 
and supply help to establish a price 
for a commodity or service in the 
market. In the financial market, the 
households are suppliers of funds and 
business firms represent the demand. 
The interaction between them helps 
to establish a price for the financial 
asset which is being traded in that 
particular market. 
Financial System
Ch_10.indd   254 29-Dec-20   3:25:42 PM
2022-23
Page 4


chapter 
10
Financial Markets senseX — t he BoMBay s tock 
e Xchange s ensitive i ndeX
Have you counted the number of 
times newspaper headlines in the past 
few weeks have been discussing the 
SENSEX? It goes up and down all the 
time and seems to be a very important 
part of business and economic news. 
Has that made you wonder what the 
SENSEX actually is?
 The SENSEX is the benchmark 
index of the BSE. Since the BSE has 
been the leading exchange of the 
Indian secondary market, the SENSEX 
has been an important indicator of 
the Indian stock market. It is the 
most frequently used indicator while 
reporting on the state of the market. 
An index has just one job: to capture 
the price movement. So a stock index 
will reflect the price movements of 
shares while a bond index captures the 
manner in which bond prices go up or 
down. If the SENSEX rises, it indicates 
the market is doing well. Since stocks 
are supposed to reflect what companies 
expect to earn in the future, a rising 
index indicates that investors expect 
better earnings from companies. It 
is also a measure of the state of the 
Indian economy. If Indian companies 
are expected to do well, obviously the 
economy should do well too. 
 The SENSEX, launched in 1986 
is made up of 30 of the most actively 
traded stocks in the market. In fact, 
they account for half the BSE’s market 
capitalisation. They represent 13 sectors 
of the economy and are leaders in their 
respective industries.
LEARNING OBJECTIVES
After studying this chapter, 
you should be able to:
 ¾ explain the meaning of 
Financial Market;
 ¾ explain the meaning of 
Money Market and describe 
its major Instruments;
 ¾ explain the nature and 
types of Capital Market;
 ¾ distinguish between 
Money Market and Capital 
Market;
 ¾ explain the meaning 
and functions of Stock 
Exchange;
 ¾ describe the functioning of 
NSEI and OTCEI; and
 ¾ describe the role of SEBI in 
investor protection.
Ch_10.indd   252 29-Dec-20   3:25:25 PM
2022-23
FINANCIAL MARKETS
253
i ntroduction You all know that a business needs 
finance from the time an entrepreneur 
makes the decision to start it. It needs 
finance both for working capital 
requirements such as payments for raw 
materials and salaries to its employees, 
and fixed capital expenditure such as 
the purchase of machinery or building 
or to expand its production capacity. 
The above example gives a fair picture 
of how companies need to raise funds 
from the capital markets. Idea Cellular 
decided to enter the Indian capital 
market for its needs of expansion. In 
this chapter you will study concepts 
like private placement, Initial public 
Offer (IPO) and capital markets which 
you come across in the example of 
Idea Cellular. Business can raise 
these funds from various sources and 
in different ways through financial 
markets. This chapter provides a brief 
description of the mechanism through 
which finances are mobilised by a 
business organisation for both short 
term and long term requirements. It also 
explains the institutional structure and 
the regulatory measures for different 
financial markets.
c oncept oF Financial Market A business is a part of an economic 
system that consists of two main 
sectors – households which save 
funds and business firms which 
invest these funds. A financial market 
helps to link the savers and the 
investors by mobilizing funds between 
them. In doing so it performs what is 
known as an allocative function. It 
allocates or directs funds available for 
investment into their most productive 
investment opportunity. When the 
allocative function is performed well, 
two consequences follow:
• The rate of return offered to 
households would be higher
• Scarce resources are allocated to 
those firms which have the highest 
productivity for the economy.
There are two major alternative 
mechanisms through which allocation 
of funds can be done: via banks or 
via financial markets. Households 
can deposit their surplus funds with 
banks, who in turn could lend these 
funds to business firms. Alternately, 
households can buy the shares and 
debentures offered by a business 
using financial markets. The process 
by which allocation of funds is done is 
called financial intermediation. Banks 
and financial markets are competing 
intermediaries in the financial system, 
and give households a choice of where 
they want to place their savings. 
A financial market is a market 
for the creation and exchange of 
HOUSEHOLDS BUSINESS FIRMS
INVESTORS
SAVERS 
BANKS
 FINANCIAL MARKETS
Ch_10.indd   253 29-Dec-20   3:25:34 PM
2022-23
BUSINESS  STUDIES
254
financial assets. Financial markets 
exist wherever a financial transaction 
occurs. Financial transactions could 
be in the form of creation of financial 
assets such as the initial issue of 
shares and debentures by a firm or the 
purchase and sale of existing financial 
assets like equity shares, debentures 
and bonds.
Functions oF Financial Market Financial markets play an important 
role in the allocation of scarce resources 
in an economy by performing the 
following four important functions.
1. 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: You 
all know that the forces of demand 
and supply help to establish a price 
for a commodity or service in the 
market. In the financial market, the 
households are suppliers of funds and 
business firms represent the demand. 
The interaction between them helps 
to establish a price for the financial 
asset which is being traded in that 
particular market. 
Financial System
Ch_10.indd   254 29-Dec-20   3:25:42 PM
2022-23
FINANCIAL MARKETS
255
3. Providing Liquidity to Financial 
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 into 
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 each other. The financial 
market is thus, a common platform 
where buyers and sellers can meet for 
fulfillment of their individual needs. 
Financial markets are classified 
on the basis of the maturity of 
financial instruments traded in them. 
Instruments with a maturity of less 
than one year are traded in the money 
market. Instruments with longer 
maturity are traded in the capital 
market.
Money Market The money market is a market for short 
term funds which deals in monetary 
assets whose period of maturity is 
upto one year. These assets are close 
substitutes for money. It is a market 
where low risk, unsecured and short 
term debt instruments that are highly 
liquid are issued and actively traded 
everyday. It has no physical location, 
but is an activity conducted over the 
telephone and through the internet. 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. The major participants in 
the market are the Reserve Bank of 
India (RBI), Commercial Banks, Non-
Classification of Financial Markets
 FINANCIAL MARKET
MONEY MARKET CAPITAL MARKET
   Primary market Secondary Market
  Debt Equity Debt Equity
Ch_10.indd   255 29-Dec-20   3:25:42 PM
2022-23
Page 5


chapter 
10
Financial Markets senseX — t he BoMBay s tock 
e Xchange s ensitive i ndeX
Have you counted the number of 
times newspaper headlines in the past 
few weeks have been discussing the 
SENSEX? It goes up and down all the 
time and seems to be a very important 
part of business and economic news. 
Has that made you wonder what the 
SENSEX actually is?
 The SENSEX is the benchmark 
index of the BSE. Since the BSE has 
been the leading exchange of the 
Indian secondary market, the SENSEX 
has been an important indicator of 
the Indian stock market. It is the 
most frequently used indicator while 
reporting on the state of the market. 
An index has just one job: to capture 
the price movement. So a stock index 
will reflect the price movements of 
shares while a bond index captures the 
manner in which bond prices go up or 
down. If the SENSEX rises, it indicates 
the market is doing well. Since stocks 
are supposed to reflect what companies 
expect to earn in the future, a rising 
index indicates that investors expect 
better earnings from companies. It 
is also a measure of the state of the 
Indian economy. If Indian companies 
are expected to do well, obviously the 
economy should do well too. 
 The SENSEX, launched in 1986 
is made up of 30 of the most actively 
traded stocks in the market. In fact, 
they account for half the BSE’s market 
capitalisation. They represent 13 sectors 
of the economy and are leaders in their 
respective industries.
LEARNING OBJECTIVES
After studying this chapter, 
you should be able to:
 ¾ explain the meaning of 
Financial Market;
 ¾ explain the meaning of 
Money Market and describe 
its major Instruments;
 ¾ explain the nature and 
types of Capital Market;
 ¾ distinguish between 
Money Market and Capital 
Market;
 ¾ explain the meaning 
and functions of Stock 
Exchange;
 ¾ describe the functioning of 
NSEI and OTCEI; and
 ¾ describe the role of SEBI in 
investor protection.
Ch_10.indd   252 29-Dec-20   3:25:25 PM
2022-23
FINANCIAL MARKETS
253
i ntroduction You all know that a business needs 
finance from the time an entrepreneur 
makes the decision to start it. It needs 
finance both for working capital 
requirements such as payments for raw 
materials and salaries to its employees, 
and fixed capital expenditure such as 
the purchase of machinery or building 
or to expand its production capacity. 
The above example gives a fair picture 
of how companies need to raise funds 
from the capital markets. Idea Cellular 
decided to enter the Indian capital 
market for its needs of expansion. In 
this chapter you will study concepts 
like private placement, Initial public 
Offer (IPO) and capital markets which 
you come across in the example of 
Idea Cellular. Business can raise 
these funds from various sources and 
in different ways through financial 
markets. This chapter provides a brief 
description of the mechanism through 
which finances are mobilised by a 
business organisation for both short 
term and long term requirements. It also 
explains the institutional structure and 
the regulatory measures for different 
financial markets.
c oncept oF Financial Market A business is a part of an economic 
system that consists of two main 
sectors – households which save 
funds and business firms which 
invest these funds. A financial market 
helps to link the savers and the 
investors by mobilizing funds between 
them. In doing so it performs what is 
known as an allocative function. It 
allocates or directs funds available for 
investment into their most productive 
investment opportunity. When the 
allocative function is performed well, 
two consequences follow:
• The rate of return offered to 
households would be higher
• Scarce resources are allocated to 
those firms which have the highest 
productivity for the economy.
There are two major alternative 
mechanisms through which allocation 
of funds can be done: via banks or 
via financial markets. Households 
can deposit their surplus funds with 
banks, who in turn could lend these 
funds to business firms. Alternately, 
households can buy the shares and 
debentures offered by a business 
using financial markets. The process 
by which allocation of funds is done is 
called financial intermediation. Banks 
and financial markets are competing 
intermediaries in the financial system, 
and give households a choice of where 
they want to place their savings. 
A financial market is a market 
for the creation and exchange of 
HOUSEHOLDS BUSINESS FIRMS
INVESTORS
SAVERS 
BANKS
 FINANCIAL MARKETS
Ch_10.indd   253 29-Dec-20   3:25:34 PM
2022-23
BUSINESS  STUDIES
254
financial assets. Financial markets 
exist wherever a financial transaction 
occurs. Financial transactions could 
be in the form of creation of financial 
assets such as the initial issue of 
shares and debentures by a firm or the 
purchase and sale of existing financial 
assets like equity shares, debentures 
and bonds.
Functions oF Financial Market Financial markets play an important 
role in the allocation of scarce resources 
in an economy by performing the 
following four important functions.
1. 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: You 
all know that the forces of demand 
and supply help to establish a price 
for a commodity or service in the 
market. In the financial market, the 
households are suppliers of funds and 
business firms represent the demand. 
The interaction between them helps 
to establish a price for the financial 
asset which is being traded in that 
particular market. 
Financial System
Ch_10.indd   254 29-Dec-20   3:25:42 PM
2022-23
FINANCIAL MARKETS
255
3. Providing Liquidity to Financial 
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 into 
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 each other. The financial 
market is thus, a common platform 
where buyers and sellers can meet for 
fulfillment of their individual needs. 
Financial markets are classified 
on the basis of the maturity of 
financial instruments traded in them. 
Instruments with a maturity of less 
than one year are traded in the money 
market. Instruments with longer 
maturity are traded in the capital 
market.
Money Market The money market is a market for short 
term funds which deals in monetary 
assets whose period of maturity is 
upto one year. These assets are close 
substitutes for money. It is a market 
where low risk, unsecured and short 
term debt instruments that are highly 
liquid are issued and actively traded 
everyday. It has no physical location, 
but is an activity conducted over the 
telephone and through the internet. 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. The major participants in 
the market are the Reserve Bank of 
India (RBI), Commercial Banks, Non-
Classification of Financial Markets
 FINANCIAL MARKET
MONEY MARKET CAPITAL MARKET
   Primary market Secondary Market
  Debt Equity Debt Equity
Ch_10.indd   255 29-Dec-20   3:25:42 PM
2022-23
BUSINESS  STUDIES
256
Banking Finance Companies, State 
Governments, Large Corporate Houses 
and Mutual Funds. 
Money Market i nstruMents 1. Treasury Bill: A Treasury bill is 
basically an instrument of short-term 
borrowing by the Government of India 
maturing in less than one year. They 
are also known as Zero Coupon Bonds 
issued by the Reserve Bank of India 
on behalf of the Central Government 
to meet its short-term requirement 
of funds. Treasury bills are issued in 
the form of a promissory note. They 
are highly liquid and have assured 
yield and negligible risk of default. 
They are issued at a price which is 
lower 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. Treasury bills are 
available for a minimum amount of  
` 25,000 and in multiples thereof.
Example: Suppose an investor 
purchases a 91 days Treasury bill 
with a face value of ` 1,00,000 for 
` 96,000. By holding the bill until the 
maturity date, the investor receives 
` 1,00,000. The difference of ` 4,000 
between the proceeds received at 
maturity and the amount paid to 
purchase the bill represents the 
interest received by him.
2. 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 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. The issuance 
of commercial paper is an alternative 
to bank borrowing for large companies 
that are generally considered to be 
financially strong. It is sold at a 
discount and redeemed at par. The 
original purpose of commercial paper 
was to provide short-terms funds 
for seasonal and working capital 
needs. For example companies use 
this instrument for purposes such as 
bridge financing.
Example: Suppose a company needs 
long-term finance to buy some 
machinery. In order to raise the long 
term funds in the capital market 
the company will have to incur 
floatation costs (costs associated with 
floating of an issue are brokerage, 
commission, printing of applications 
and advertising, etc.). Funds raised 
through commercial paper are used 
to meet the floatation costs. This is 
known as Bridge Financing.
3. Call Money: Call money is short 
term finance repayable on demand, with 
a maturity period of one day to fifteen 
days, used for inter-bank transactions. 
Commercial banks have to maintain a 
minimum cash balance known as cash 
reserve ratio. The Reserve Bank of India 
changes the cash reserve ratio from 
time to time which in turn affects the 
amount of funds available to be given 
as loans by commercial banks. Call 
money is a method by which banks 
Ch_10.indd   256 29-Dec-20   3:25:42 PM
2022-23