NCERT Solutions for Class 12th: Ch 10 Financial Markets (Long Answer Questions)
Exercises
Page No. 289
Long Answer Type Questions
1. Explain the various money Market Instruments.
Answer
Money Market Instruments are-
1. Treasury Bill: it is a short-term instrument and 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 also known as zero coupon bonds. 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 Rs 25,000.
2. Commercial paper: commercial paper is a short term unsecured promissory note.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. It is sold at a discount and redeemed at par. The main purpose of commercial paper was to provide short – term funds for seasonal and working capital needs.
3. Call money: Call money is short- term finance repayable on demand, with a maturity period of one day to fifteen days. Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. The reserve banks of India changes the cash reserve ratio from time to time. Which affect the amount of funds available to be given as loans by Commercial Banks. The interest rate paid on call money loans is known as the call rate. There is an inverse relationship between call rates and other short term money market, a rise in call rates money makes other sources of finance such as commercial paper and certificate of deposit cheaper in comparison for banks raise funds from these sources.
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. They help to mobilise a large amount of money for short periods.
5. Commercial Bill: A commercial bill is a bill of exchange used to finance the working capital requirements of business firms. It is a short term negotiable, self-liquidating instrument 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.
2. What are the methods of floatation in Primary Market?
Answer
Methods of floatation in Primary market:
1. 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, through an advertisement in newspapers and magazines. The issues may be underwritten and also required to be listed on at least one stock exchange. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines.
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 enbloc at an agreed price to brokers who, in turn, resell them to the investing public.
3. Private placement: it is the allotment of securities by a company to institutional investors and individual. It helps companies to raise capitals more quickly than a public issue. It is expensive on account of various mandatory and non-mandatory expenses. Some companies cannot afford a public issue so they choose to use private placement.
4. Rights issue: under this method shareholder are offered the ‘ right’ to buy new shares in proportion to the number of shares. This is a privilege only given to the existing shareholder to subscribe new issues according to the terms and condition.
5. 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). Only SEBI registered brokers have to select for the accepting applications and placing orders with the company. The lead manager coordinates all the activities amongst intermediaries connected with the issue.
3. Explain the recent 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
• Establishing a nationwide trading facility for all types of securities.
• Ensuring equal access to investors all over the country through an appropriate communication network.
• Providing a fair, efficient and transparent securities market using electronic trading system.
• Enabling shorter settlement cycles and book entry settlements.
• 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.
4. Explain the objective and functions of the SEBI?
Answer
The objective of SEBI:
• To regulate stock exchanges and securities industry to promote their orderly functioning.
• To protect the rights and interests of investors, particularly individual investors and to guide and educate them.
• To prevent trading malpractices and achieve a balance between self – regulation by the securities industry and its regulation.
• 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.
Function of SEBI
SEBI has generally doing twin task both regulation and development:
Regulatory functions
• Registration of brokers and sub-brokers and other players in the market.
• Registration of collective investment schemes and mutual funds.
• Regulation of stock brokers, portfolio exchange, underwriters and merchant bankers and the business in stock exchange and any other securities market.
• Regulation of takeover bids by companies.
• Calling for information by under- taking inspection, conducting enquiries and audits of stock exchange and intermediaries.
• Levying fee or other charges for carrying out the purposes of the act.
Development function
• Training of intermediaries of the securities market.
• Conducting research and publishing information useful to all market participants.
• Undertaking measures to develop the capital markets by adapting a flexible approach.
Protective functions
• Prohibition of fraudulent and unfair trade practices.
• Controlling insider trading and imposing penalties for such practices.
• Undertaking steps for investor protection.
• Promotion of fair practices and code of conduct in securities.
5. Explain the various segment of the NSE.
Answer
The exchange provides trading in the following two segments
• Whole Sale Debt Market Segments: This segments provides a trading platform for a wide range of fixed income securities that include central government securities, treasury bill, state development loans, bond issued by public sector undertakings, floating rate bond, commercial paper, certificate of deposit, corporate debentures and mutual funds.
• Capital Market Segment: this segment of NSE provides an efficient and transparent platform for trading in equity, preference, debentures, exchange traded funds as well as retail government securities.
Page No. 289
Long Answer Type Questions
1. Explain the various money Market Instruments.
Answer
Money Market Instruments are-
1. Treasury Bill: it is a short-term instrument and 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 also known as zero coupon bonds. 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 Rs 25,000.
2. Commercial paper: commercial paper is a short term unsecured promissory note.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. It is sold at a discount and redeemed at par. The main purpose of commercial paper was to provide short – term funds for seasonal and working capital needs.
3. Call money: Call money is short- term finance repayable on demand, with a maturity period of one day to fifteen days. Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. The reserve banks of India changes the cash reserve ratio from time to time. Which affect the amount of funds available to be given as loans by Commercial Banks. The interest rate paid on call money loans is known as the call rate. There is an inverse relationship between call rates and other short term money market, a rise in call rates money makes other sources of finance such as commercial paper and certificate of deposit cheaper in comparison for banks raise funds from these sources.
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. They help to mobilise a large amount of money for short periods.
5. Commercial Bill: A commercial bill is a bill of exchange used to finance the working capital requirements of business firms. It is a short term negotiable, self-liquidating instrument 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.
2. What are the methods of floatation in Primary Market?
Answer
Methods of floatation in Primary market:
1. 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, through an advertisement in newspapers and magazines. The issues may be underwritten and also required to be listed on at least one stock exchange. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines.
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 enbloc at an agreed price to brokers who, in turn, resell them to the investing public.
3. Private placement: it is the allotment of securities by a company to institutional investors and individual. It helps companies to raise capitals more quickly than a public issue. It is expensive on account of various mandatory and non-mandatory expenses. Some companies cannot afford a public issue so they choose to use private placement.
4. Rights issue: under this method shareholder are offered the ‘ right’ to buy new shares in proportion to the number of shares. This is a privilege only given to the existing shareholder to subscribe new issues according to the terms and condition.
5. 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). Only SEBI registered brokers have to select for the accepting applications and placing orders with the company. The lead manager coordinates all the activities amongst intermediaries connected with the issue.
3. Explain the recent 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
• Establishing a nationwide trading facility for all types of securities.
• Ensuring equal access to investors all over the country through an appropriate communication network.
• Providing a fair, efficient and transparent securities market using electronic trading system.
• Enabling shorter settlement cycles and book entry settlements.
• 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.
4. Explain the objective and functions of the SEBI?
Answer
The objective of SEBI:
• To regulate stock exchanges and securities industry to promote their orderly functioning.
• To protect the rights and interests of investors, particularly individual investors and to guide and educate them.
• To prevent trading malpractices and achieve a balance between self – regulation by the securities industry and its regulation.
• 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.
Function of SEBI
SEBI has generally doing twin task both regulation and development:
Regulatory functions
• Registration of brokers and sub-brokers and other players in the market.
• Registration of collective investment schemes and mutual funds.
• Regulation of stock brokers, portfolio exchange, underwriters and merchant bankers and the business in stock exchange and any other securities market.
• Regulation of takeover bids by companies.
• Calling for information by under- taking inspection, conducting enquiries and audits of stock exchange and intermediaries.
• Levying fee or other charges for carrying out the purposes of the act.
Development function
• Training of intermediaries of the securities market.
• Conducting research and publishing information useful to all market participants.
• Undertaking measures to develop the capital markets by adapting a flexible approach.
Protective functions
• Prohibition of fraudulent and unfair trade practices.
• Controlling insider trading and imposing penalties for such practices.
• Undertaking steps for investor protection.
• Promotion of fair practices and code of conduct in securities.
5. Explain the various segment of the NSE.
Answer
The exchange provides trading in the following two segments
• Whole Sale Debt Market Segments: This segments provides a trading platform for a wide range of fixed income securities that include central government securities, treasury bill, state development loans, bond issued by public sector undertakings, floating rate bond, commercial paper, certificate of deposit, corporate debentures and mutual funds.
• Capital Market Segment: this segment of NSE provides an 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 lo 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.
1. What benefits will the company derive from listing at NSE?
Answer
• NSE provides nationwide trading facility for all types of securities.
• Providing a fair, efficient and transparent securities market using electronic trading system.
• The NSE network is used to disseminate information and company announcements across the country.
• Meeting international benchmarks and standards.
2. What are the regulations of SEBI that the company must comply with?
Answer
Following are the regulations of the SEBI for new issue that the company must comply with:
• Prospectus has to be attached with every application.
• Objective of the issue and cost of project should be mentioned in the prospectus.
(iii) Company’s management, past history and present business of the firm should be highlighted in the prospectus.
(iv) Subscription list for public issue should be kept open for a minimum of 3 days and maximum of 10 days.
(v) Collections agents are not allowed to collect application money in cash.
(vi) 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 disclosure shall be vetted by SEBI in this regard.
3. How does the SEBI exercise control over ‘R’ limited in in the interest of investors?
Answer
SEBI should provide protection of their rights and interests through adequate, accurate information and disclosure of information on a continuous basis. Prohibition of fraudulent and unfair trade practices like making misleading statements, manipulations, price rigging etc.
Case Problem II
World Markets
NSE Indices
| Index | Current | Prev. | %CHG | Index | Current | Prev. | % change |
| S&P CNX Nifty | 3641.1 | 37770.55 | -3.43% | NYSE Composite | 8926.88 | 9120.93 | -2.13% |
| CNX Nifty junior | 6458.55 | 6634.85 | -2.66% | NASDAQ Composite | 2350.57 | 2402.29 | -2.15% |
| CNX IT | 5100.5 | 5314.05 | -4.02% | DOW Jones I. A. | 12076 | 12318.6 | -1.97% |
| Bank Nifty | 5039.05 | 5251.55 | -4.05% | S&P 500 | 1377.95 | 1406.6 | -2.04% |
| CNX100 | 3519.35 | 3640.35 | -3.32% | NIKK | 16676.9 | 17178.8 | -2.92% |
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?
1. What do you mean by stock index? How is it calculated?
Answer
A stock market index is a barometer of market behaviour. It measures overall market sentiments through a set of stocks that are representative of the market. Most of the stock market uses the following 3 methods of calculating index.
• 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.
• 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.
• Value Weighted Index It is an index reflecting the aggregate market capitalisation of the sample shares in certain period in relation to base year.
2. What conclusions can you draw from the various movements of NSE stock indices?
Answer
When comparing the previous and current index of NSE it is clear that all market Index is downward for all sectors so, we can say that there is a depression in the market.
3. What factors affect the movement of stock indices? Elaborate on the nature of these factors.
Answer
In the above table, there is a fall in the domestic market. We can see the world Indices and NSE indices are moving in the same direction.
4. What relationship do you see between the movement of indices in world markets and NSE indices?
Answer
There is a direct relation between NSE indices and world market indices. As there is a negative trend in the world index, it brings a negative trend in NSE index also.
5. Give details of all the indices mentioned above, you can find information on the web or business magazines.
Answer
The above figure shows that the movement of NSE stock indices, as well as world stock indices on the date, indicated.
1. What do you mean by stock index? How is it calculated?
Answer
A stock market index is a barometer of market behaviour. It measures overall market sentiments through a set of stocks that are representative of the market. Most of the stock market uses the following 3 methods of calculating index.
• 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.
• 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.
• Value Weighted Index It is an index reflecting the aggregate market capitalisation of the sample shares in certain period in relation to base year.
2. What conclusions can you draw from the various movements of NSE stock indices?
Answer
When comparing the previous and current index of NSE it is clear that all market Index is downward for all sectors so, we can say that there is a depression in the market.
3. What factors affect the movement of stock indices? Elaborate on the nature of these factors.
Answer
In the above table, there is a fall in the domestic market. We can see the world Indices and NSE indices are moving in the same direction.
4. What relationship do you see between the movement of indices in world markets and NSE indices?
Answer
There is a direct relation between NSE indices and world market indices. As there is a negative trend in the world index, it brings a negative trend in NSE index also.
5. Give details of all the indices mentioned above, you can find information on the web or business magazines.
Answer
The above figure shows that the movement of NSE stock indices, as well as world stock indices on the date, indicated.