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

Multiple Choice Questions

1. Primary and secondary markets
(a) compete with each other
(b) complement each other
(c) function independently
(d) control each other
Answer (b) Primary Market and Secondary Market complement each other as primary
 market deals with the issue of new securities and secondary market also helps the fresh
 Investor to enter in the market.

2. The total number of Stock Exchanges in India are
(a) 20
(b) 21
(c) 22
(d) 23
Answer (d) There are 23 stock exchanges In India list of stock exchanges in India are
 Bombay, National, Regional, Ahmedabad, Bengaluru, Bhubaneshwar, Calcutta, Cochin,
 Coimbatore, Delhi, Guwahati, Hyderabad, Jaipur, Ludhiana, Madhya Pradesh, Madras
 (Chennai), Magadh, Mangalore, Meerut, OTC Exchange of India, Pune, Saurashtra
 Kutch, Vadodara.

3. The settlement cycle in NSE is
(a) T+5
(b )T+3
(c) T+2
(d) T+1
Answer (c) The settlement cycle in NSE is T + 2.

4. The National Stock Exchange of India was recognised as stock exchange in the year
(a) 1992
(b) 1993
(c) 1994
(d) 1995
Answer (b) NSE was incorporated in 1992 and was recognised as a stock exchange in
 April 1993.

5. NSEcommenced futures trading in the year
(a) 1999
(b) 2000
(c) 2001
(d) 2002
Answer (b) In 2000. NSE commenced future tradings.

6. Clearing and settlement operations of NSEis carried out by
(a) NSDL
(b) NSCCL
(c) SBI
(d) CDSL
Answer (b) NSCCL carried out the clearing and settlement operations of NSE.

7. OTeErwas started on the lines of
(a) NASDAQ
(b) NYSE
(c) NASAQ
(d) NSE
Answer (a) OTCEI (Over The Counter Exchange of lndia) established on the lines of
 NASDAQ (National Association of Securities Dealers Automated Quotations).

8. To be listed on NSE, the minimum capital requirement for a company .
(a) ₹ 5 crores
(b) ₹ 3 crores
(c) ₹ 6 crores
(d) ₹ 1 crore
Answer (b) In order to have its securities listed the companies should have an
 minimum caoual of ₹ 3 crores.

9. 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) Treasury Bills are an instrument to borrow short term funds. These are
 issued by RBI on behalf of the Government of India.

Short Answer Type Questions

Question 1. What are the functions of a Financial Market?
 Answer Financial market plays an important role in the allocation of scarce resources in
an economy by performing the fOllowing four important functions

1. Mobilisation of Savings and Channelising Them into the Most Productive Uses A
financial market facilitates the transfer of savings from savers to investors. It gives
choice to the saver of different investments and thus, it helps to channelise
surplus funds into the most productive use.

2. Facilitate Price Discovery In a 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.

3. Provide Liquidity to Financial Assets Financial markets facilitate easy purchase
and sale of financial assets. Holders of assets can readily sell their financial
assets through the mechanism of financial market.

4. Reduce the Cost of Transactions Financial markets provide valuable Information
about securities being traded n the market. It helps to save time, effort and money
that both buyers and sellers of a financial asset would have to spend to try or
otherwise lind each other

Question 2. “Money Market is essentially a Market for short term funds:’ Discuss.
 Answer 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 enables the raising of short
term funds for earning returns. The major participants in the market are the Reserve
Bank of India, Commercial Bank. Non-Banking Finance Companies, State
Governments, Large Corporate Houses and Mutual Funds.

Question 3. What is a Treasury Bill?
 Answer A treasury bill is 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 RBI 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 pnce which is lower than their face value and repaid at par treasury bills are available
for a minimum amount of ₹ 25,000.

Question 4. Distinguish between Capital Market and Money Market.
 Answer Difference between Capital and Money Market

Question 5. What are the functions of a Stock Exchange?
 Answer The efficient functioning of a stock exchange creates a conducive climate for
an active and growing primary market following are the important functions of a stock
exchange

1. Providing Liquidity and Marketability to Existing Securities The basic function of a
stock exchange is the creation of a continuous market where securities are bought
and sold. It gives investors the chance to disinvest and reinvest. Ttus provides
both liquidity and easy marketability to the existing securities in the market.
2. Pricing of Securities Share prices on a stock exchange are determined by the
forces of demand and supply. A stock exchange is a mechanism of constant
valuation through which the prices of securities are determined. Such a valuation
provides Important Instant information to both buyers and sellers in the market.
3. Safety of Transactions The membership of a stock exchange is well-regulated and
its dealings are well defined according to the existing legal framework which
ensures that the investing public gets a safe and fair deal on the market.
4. Contributes to Economic Growth A stock exchange is a market in which existing
secunties are resold or traded. This process of drsinvestment and reinvestment
saving get channelised into productive investment avenues. This leads to capital
formation and economic growth
5. Spreading of Equity Cult The stock exchange plays vital role in ensuring wider
share ownership by regulating new issues, better trading practices and taking
effective steps in educating the public about investments.
6. Providing Scope for Speculation The stock exchange provides sufficient scope
within the provisions of law for speculative activity in a restricted and controlled
manner.

Question 6. What are the objectives of the SEBI?
 Answer The overall objective of SESI is to protect the interest of investors, promote the
development and regulate the securities in market. This may be elaborated as follows
1. To regulate stock exchanges and the securities industry to promote their orderly
functioning.
2. To protect the rights and interests of investors, particularly individual investors to
guide and educate them.
3. To prevent trading malpractices and achieve a balance between self-regulation by
the securities and its statutory regulation.
4. To regulate and develop a code of conduct and fair practices by intermediaries
like brokers, merchant bankers etc with a view to making them competitive and
professional.

Question 7. State the objectives of the NSE.
 Answer NSE was setup with the following objectives
1. Establishing a nationwide trading facility for all types of securities.
2. Through an appropriate communication network, ensuring equal access to
investors.
3. Through electronic trading system, provides a fair, efficient and transparents
security market.
4. It enables shorter settlement cycles and book entry settlements. (v) Meeting
international benchmarks and standards.

Question 8. What is the OTCEI?
 Answer The OTCEI is a company incorporated under the Companies Act, 1956. It was
set up to provide small and medium companies an access to the capital market for
raisinq finance In a cost effective manner. It is fully computerised, transparent, single
window exchange which commenced trading in 1992. This exchange is established on
the lines of NASOAO the OTC exchange in USA. If has been promoted by UTI, ICICI,
lOBI, IFCI, LIC, GIC, SBI capital markets and can bank financial services.
It is a negotiated market place that exists any where as opposed to the auction market
place, represented by the activity on securities exchange. Thus, in the OTC exchange,
trading takes place when a buyer or seller walks up to an OTCEI counter, taps on the
computer screen, finds quotes and effects a purchase or sale depending on whether the
prices meet their target.

Long Answer Type Questions

Question 1. Explain the various money Market Instruments.
 Answer Money Market Instruments
 

1. Treasury Bill A treasury bill is 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 Reserve Bank of India on behalf of the Central
Government to meet its short term requirements of funds. They are issued in the
form of a promissory note. They are highly liquid and issued at a price which is
lower than their face value and repaid at par. Treasury bills are available for a
minimum amount of ₹ 25,000.

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 finally strong. It
is sold at discount and redeemed at par.

3. Call Money Call money is a 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. Call money is a method by which banks borrow from each other.

4. Certificate of Deposit Certificates of deposit are unsecured, negotiable, short
term instruments in bearer form, issued by Commercial Banks and development
financial institutions. They can be issued to individuals, corporations and
companies during periods of tight liquidity when the deposit qrowth of banks is
slow but the demand for credit is high. They help to mobilise a large amount of
money for short periods.

5. A Commercial Bill A commercial bill is a bill of exchange used to finance the
working capital requirements of business firms. It is a short term negotiable, selfliquida.
ting instrument which is used to finance the credit sales of firms, when
goods are sold on credit, the buyer becomes liable to make payment on a specific
date in future.

Question 2. What are the methods of floatation in Primary Market?
 Answer The primary market is also known as the new issues market. It deals with new
securities being issued for the first time. There are various methods of floating new
issues in the primary market

i) Offer Through Prospectus This involves inviting subscription from the public
through issue of prospectus. A prospectus makes a direct appeal to investors to raise
capital, throuqh an advertisement in newspapers and magazines. The issues may be
under written and also required to be listed on at least one stock exchange. The
contents at the prospectus have to be in accordance with the provisions of the
Companies Act and SEBI disclosure and investor protection guidelines.

(ii) Offer for Sale Under this method securities are not issued directly to the public but
offered for sale through intermediaries like issuing houses or stock brokers. In this case,
company sells securities enblock at an agreed price to brokers who, in turn, resell them
to the investing public.

(iii) Private Placement Private placement is the allotment of securities by a company to
institutional investors and some selected individuals. It helps to raise capital more
quickly than a public issue. Access to the primary market can be expensive on account
of various mandatory and non-mandatory expenses.

(iv) Rights Issue This is a privilege given to existing shareholders to subscribe to a new
issue of shares according to the terms andconditions of the company. Th~ shareholder
are offered the ‘right’ to buy new shares in proportion to the number of shares they
already possess.

(v) e-IPOs A company proposing to issue capital to the public through the on-line
system of the stock exchange has to enter into an agreement with the stock exchange.
This is called an Initial Public Offer (IPO). SEBI registered broke?s have to be appointed
for the purpose of accepting applications and placing orders with the company the
issuer company should appoint a registrar to the issue having electronic connectivity
with the exchange. The issuer company can apply for listing of its securities on any
exchange other than the exchange through which it has offered its securities. The lead
manager co-ordinates all the activities amongst intermediaries connected with the issue.

Question 3. Explain the Capital Market reforms in India.
 Answer The National Stock Exchange is the latest, most modern and technology driven
exchange. NSE has setup a nationwide fully automated screen based trading system.
The NSE was setup by leading financial institutions, banks, insurance companies and
others financial intermediaries. It is managed by professionals, who do not directly or
indirectly trade on the exchange. The trading rights are with the trading members who
offer their services to the investors. The Board of NSE comprises senior executives
from promoter institutions and eminent professionals, without having any representation
from trading members.

Objectives of NSE

1. Establishing a nationwide trading facility for all types of securities.
2. Ensuring equal access to investors all over the country through an appropriate
communication network.
3. Providing a fair, efficient and transparent securities market using electronic trading
system.
4. Enabling shorter settlement cycles and book entry settlements. (v) Meeting
international bench marks and standards ..
Within a span of 10 year, NST Was able to achieve its objectives for which it was set
up. It has been playing a leading role as a change agent in transforming the Indian
capital market.

Question 4. Explain the objectives and functions of SEBI.
 Answer Objectives of SEBI (already discussed in of short answer type questions)

Functions of SEBI

Keeping in mind the emerging nature of the securities market in India, SEBI was
entrusted with the twin task of both regulation and development of the securities market.
It has certain functions

Regulatory Functions

1. Registration of brokers and sub-brokers and other players in the market.
2. Registration of collective investment schemes and mutual funds.
3. Regulation of stock brokers, portfolio exchanges, underwriters and merchant
bankers and the business in stock exchanges and any other securities market.
4. Regulation of takenover bids by companies.
5. Calling for information by undertaking inspection conducting enquiries and audits
of stock exchanges and intermediaries.
6. Levying for or other charges for carrying out the purposes of the act.
7. Performing and exercising such power under Securities Contracts Act. 1956, as
may be delegated by the Government of India.

Development Functions

1. Training of intermediaries of the securities market.
2. Conducting research and publishing information useful to all market segments.
3. Undertaking measures to develop the capital markets by adopting a flexible
approach.

Protective Functions

1. Prohibition of fraudulent and unfair trade practice
like making misleading statements, manipulations, price rigging etc.
2. Controlling insider trading and imposing penalties for such practices.
3. Undertaking steps for investor protection.
4. Promotion of fair practices and code of conduct in securities market.

Question 5. Explain the various seqments of NSE.
 Answer NSE provides trading in the following two segments
1. Whole Sale Debt Market Segment This segment provides a trading platform for a
wide range of fixed income securities that include central government securities,
treasury bills, state development loans, bonds issued by public sector
undertakings, floating rate bonds, zero coupon bonds, index bonds, commercial
paper, certificate of deposit, corporate debentures and mutual funds.

2. Capital Market Segment The capital market segment of NSE provides efficient
and transparent platform for trading in equity, preference, debentures, exchange
traded funds as well as retail government securities.

Case Problems

1. ‘R’ Limited is a real estate company which was formed in 1950.
In about 56 years of its existence the company has managed to carve out a niche for
itself in this sector. Lately, this sector is witnessing a boom due to the fact, that the
Indian economy is on the rise. The incomes of middle class are rising. More people can
afford to buy homes for themselves due 10 easy availability of loans and accompanying
tax concessions.
To expand its business in India and abroad the company is weight various options to
raise money through equity offerings in India. Whether to tap equity or debt, market
whether to raise money from domestic market or international market or combination of
both? When their to raise the necessary finance from money market or capital market. It
is also planning to list itself in New York Stock Exchange to raise money through ADR’s.
To make its offerings attractive it is planning to offer host of financial plans products to
its stakeholders and investors and also expand it’s listing at NSE after complying with
the regulations of SEBI.

Question 1. What benefits will the company derive from listing at NSE?
 Answer Following are the benefits the company can derive from listtng at NSE
1. NSE provides nationwide trading facility for all types of facilities.
2. The liquidity and best available prices for the securities are ensured by the
processing speed of the exchange.
3. The NSE network is used to disseminate information and company
announcements across the country.
4. Enabling shorter settlement cycles and book entry settlement.

Question 2. What are the regulations of SEBr that the company must comply with?
 Answer Following are the regulations of the SEBI for new issue that the company must
comply with
1. Prospectus has to be attached with every application.
2. Objective of the issue and cost of project should be mentioned in the prospectus.
3. Company’s management, past history and present business of the firm should be
highlighted in the prospectus.
4. Subscnption I st for public issue should be kept open for a minimum of 3 days and
maximum of 10 days.
5. Collections agents are not allowed to collect application money in cash.
6. Issue should make adequate disclosure regarding the terms and conditions of
redemption security conversion and other relevant features of the new Instrument
so that an investor can make reasonable determination of risks returns. safety and
liqUidity of the instrument The disclore shall be vetted by SESI In this regard

Question 3. How does the SEBl exercise control over ‘R’ Limited in the interest of
 investors?
 Answer SESI will exercise control over ‘R’ limited by
1. Prohibiting fraudulent and unfair trade practices In the securities market unfair
trade practices Include pnce rigging. making misleading statements
2. Prohibiting msider trading I.e., restricts the persons having access to price
sensitive information about the company to take undue advantage of it.
3. Examing that adequate disclosure about the terms and conditions of redemption,
security conversion and other relevant features of the new Instrument at the time
of issue is made so that an investor can make reasonable determination of risks
returns. safety and liquidity of the instrument.

The above figures are taken from the website of National Stock Exchange of India. They
illustrate the movement of NSE stock indices as well as world stock indices on the date
indicated.

Question 1. What do you mean by a stock index? How is it calculated?
 Answer Stock index refers to the index used to capture the movement of the stock
market. It IS a barometer which measures overall market trend through a set of stocks
which are representatives of the market An ideal index must represent changes in the
prices of securities and also show the pnce movement of different classes of shares.
Most of the stock market uses the following 3 methods of calculating index.

1. Price Weighted Index An index reflecting the sum of the prices of the sample
share in a certain year/month/week/day with reference to a base year.
2. Equal Weighted Index An index reflecting the simple arithmetic average of the
price relatives of a sample of shares in a certain period with reference to base
year.
3. Value Weighted Index It is an index reflecting the aggregate market capitalisation
of the sample shares in certain period in relation to base year.

Question 2. What conclusions can you draw from the various movements of NSE stock
 indices?
 Answer There is a downward swing in the stock market. While comparing the previous
and current index of NSE we can say that there is a depression in the market as index
is down for all the sectors.

Question 3. What factors affect the movement of stock indices? Elaborate on the
 nature of these factors.
 Answer The fall in the domestic market. as given in the above table, can significantly be
attributed to the market sentiments of world market. We can see the world indices and
NSE indices are moving in the same direction.

Question 4. What relationship do you see between the movement of indices in world
 markets and NSE indices?
 Answer There is direct relation between NSE indices and world market indices. As
there is negative trend in world index, it brings negative trend in NSE index also.

Question 5. Give details of all the indices mentioned above, you can find information on
 the web or business magazines.
 Answer Answer to this question is based on reader’s evaluation.