12th commerce guide Chapter 4: FINANCIAL MARKETS - New reduced syllabus 2021 - Book back Question and answer guide

I. Very Short Answer Questions: 

1. What are the components of organized sectors? 

1. Organized sector consist of, i.Regulators ii. Financial Institutions iii. Financial Markets and Financial Services 

2. Write a note on financial market. 

1. A market wherein financial instruments such as financial claims, assets and securities are traded is known as a ‘financial market.

3. What is spot market?

1. It is a market where the delivery of the financial instrument and payment of cash occurs immediately. i.e. settlement is completed immediately. 

4. What is debt market? 

1. It is the financial market for trading in Debt Instrument (i.e. Government Bonds or Securities, Corporate Debentures or Bonds)

5. How is prize decided in a secondary market?

1. Prices in the secondary market are determined by the basic forces of supply and demand. If the majority of investors believe a stock will increase in value and rush to buy it, the stock's price will typically rise.

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II. Short Answer Questions: 

1. Give the meaning and definition of financial market. 

Meaning:

1. A market wherein financial instruments such as financial claims, assets and securities are traded is known as a ‘financial market’.According to Brigham, Eugene F, “The place where people and organizations wanting to borrow money are brought together with those having surplus funds is called a financial market.”

2. Differentiate spot market from future market. 

1. (i) Cash/Spot Market is a market where the delivery of the financial instrument and payment of cash occurs immediately. i.e. settlement is completed immediately. 
2. (ii) Forward or Futures Market is a market where the delivery of asset and payment of cash takes place at a pre-determined time frame in future.

3. Write a note on Secondary Market. 

1.  The place where formerly issued securities are traded is known as Secondary Market.(Resale Market)
2.  Secondary Market is the market for securities that are already issued. Stock Exchange is an important institution in the secondary market.
3.  It does not provide funding to companies

4. Bring out the scope of financial market in india.

1.  The financial market provides financial assistance to individuals, agricultural sectors, industrial sectors, service sectors, financial institutions like banks, insurance sectors, provident funds and the government as a whole.
2.  With the help of the financial market all the above stated individuals, institutions and the Government can get their required funds in time.
3.  Through the financial market the institutions get their short term as well as long term financial assistance. It leads to the overall economic development.

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III. Long Answer Questions: 

1. Distinguish between new issue market and secondary market. 

2. Enumerate the different kinds of financial markets 

a. On the Basis of Type of Financial Claim 

1. (i) Debt Market is the financial market for trading in Debt Instrument 
2. i.e. Government Bonds or Securities, Corporate Debentures or Bonds
3. (ii) Equity Market is the financial market for trading in Equity Shares of Companies. 

b. On the Basis of Maturity of Financial Claim 

1. (i) Money Market is the market for short term financial claim (usually one year or less) E.g. Treasury Bills, Commercial Paper, Certificates of Deposit 
2. (ii) Capital Market is the market for long term financial claim more than a year E.g. Shares, Debentures 

C. On the Basis of Time of Issue of Financial Claim

1. (i) Primary Market is a term used to include all the institutions that are involved in the sale of securities for the first time by the issuers (companies). Here the money from investors goes directly to the issuers. 
2. (ii) Secondary Market is the market for securities that are already issued. Stock Exchange is an important institution in the secondary market. 

d. On the Basis of Timing of Delivery of Financial Claim 

1. (i) Cash/Spot Market is a market where the delivery of the financial instrument and payment of cash occurs immediately. i.e. settlement is completed immediately. 
2. (ii) Forward or Futures Market is a market where the delivery of asset and payment of cash takes place at a pre-determined time frame in future. 

e. On the Basis of the Organizational Structure of the Financial Market 

1. (i) Exchange Traded Market is a centralized organization (stock exchange) with standardized procedures. 
2. (ii) Over–the–Counter Market is a decentralized market (outside the stock exchange) with customized procedures. The above classification is not rigid. One market may come under more than one category.

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3. Discuss the role of financial market. 

(i) Savings Mobilization:

1. Obtaining funds from the savers or ‘surplus’ units such as household individuals, business firms, public sector units, Government is an important role played by financial markets. 

(ii) Investment :

1. Financial market plays a key role in arranging the investment of funds thus collected, in those units which are in need of the same. 

(iii) National Growth 

1. Financial markets contribute to a nation’s growth by ensuring an unfettered flow of surplus funds to deficit units. Flow of funds for productive purposes is also made possible. It leads to overall economic growth. 

(iv) Entrepreneurship Growth

1. Financial markets contribute to the development of the entrepreneurial class by making available the necessary financial resources. 

(v) Industrial Development

1. The different components of financial markets help an accelerated growth of industrial and economic development of a country and thus contributing to raising the standard of living and the society’s well-being

4. What are the functions of Financial Markets? 

I. INTERMEDIARY FUNCTIONS:

(i) Transfer of Resources:

1. Financial markets facilitate the transfer of real economic resource from lenders to ultimate borrowers.

(ii) Enhancing Income: 

1. Financial markets allow lenders earn interest/dividend on their surplus investible funds and thus contributing to the enhancement of the individual and the national income. 

(iii) Productive Usage: 

1. Financial markets allow for the productive use of the funds borrowed and thus enhancing the income and the gross national production. 

(iv) Capital Formation: 

1. Financial markets provide a channel through which new savings flow to aid capital formation of a country.

(v) Sale Mechanism: 

1. Financial market provides a mechanism for selling of a financial asset by an investor so as to offer the benefits of marketability and liquidity of such assets. 

II THE FINANCIAL FUNCTIONS:

1. (i) Providing the borrowers with funds so as to enable them to carry out their investment plans 

1. (ii) Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in productive ventures 
2. (iii) Providing liquidity in the market so as to facilitate trading of funds.

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12th commerce Guide - new reduced syllabus based book back Questions and answer