12th commerce Guide Chapter 6: MONEY MARKET - Reduced syllabus 2021 based - book back Questions and answer

I. Very Short Answer Questions: 

1. Define the term “Money Market”. 

1. According to Crowther, ”the money market is the collective name given to the various firms and institutions that deal in the various grades of near money”.

2. What is a CD market? 

1.  Certificate of Deposits are short-term deposit instruments issued by banks and inancial institutions to raise large sums of money.
2.  Certificate of Deposits are issued in the form of usance promissory notes.

3. What is Government Securities Market? 

1. A market whereby the Government or gilt-edged securities can be bought and sold is called ‘Government Securities Market’.

4. What do you meant by Auctioning? 

1. A method of trading whereby merchants bid against one another and where the securities are sold to the highest bidder is known as ‘auctioning’.

5. What do you meant by Switching?

1. The purchase of one security against the sale of another security carried out by the RBI in the secondary market as part of its open market operations is described as‘Switching’.

II. Short Answer Questions:

1. What are the features of Treasury Bills?

Treasury Bills incorporate the following general features.

1.  Issuer
2.  Finance Bills
3.  Liquidity
4. Vital Source
5.  Monetary Management

2. Who are the participants of Money Market?

1.  Government of different countries
2. Central Banks of different countries
3. Private and Public Banks
4.  Mutual Funds Institutions 
5. Insurance Companies
6. . Non-Banking Financial Institutions 
7.  RBI and SBI

3. Explain the types of Treasury Bills?

 91 days Treasury Bills :

1.  Its issued at a fixed discount rate of 4 per cent as well as through auctions. 182 days Treasury Bills: 
2.  The RBI holds 91 days and 182 Treasury Bills and they are issued on tap basis throughout the week.

 364 days Treasury Bills: 

1.  364 days Treasury Bills do not carry any fixed rate. The discount rate on these bills are quoted in auction by the participants and accepted by the authorities. Such a rate is called cut off rate.

4. What are the features of Certificate of Deposit?

1.  Document of title to time deposit
2.  It is unsecured negotiable instruments.
3.  It is freely transferable by endorsement and delivery.
4.  It is issued at discount to face value.
5.  It is repayable on a fixed date without grace days.

5. What are the types of Commercial Bill?

1.  Demand and Usance Bills
2.  Clean bills and documentary Bills
3.  Inland bills and Foreign Bills
4.  Indigeneous Bills
5.  Accommodation and supply Bills

III. Long Answer Questions:

1. Differentiate between the Money Market and Capital Market.

2. Explain the characteristics of Money Market?

1.Short-term Funds

• It is a market purely for short-term funds or financial assets called near money.

2.Maturity Period

• It deals with financial assets having a maturity period upto one year only.

3.Conversion of Cash

• It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost.

4.Existence of Secondary Market

• There should be an active secondary market for these instruments.

5.Demand and Supply of Funds

• There should be a large demand and supply of short-term funds. It presupposes the existence of a large domestic and foreign trade.

6.Wholesale Market

• It is a wholesale market and the volume of funds or financial assets traded in the market is very large.

7.Flexibility

• Due to greater flexibility in the regulatory framework, there are constant endeavours for introducing new instruments.

8.No Formal Place: 

• Generally, transactions take place through phone, i.e., oral communication.

3. Explain the Instruments of Money Market?

I.Treasury bill :

1.  A Treasury bill is nothing but a promissory note issued for a specified period stated therein. 
2.  The Government promises to pay the specified amount mentioned therein to the bearer of the instrument on the due date. 
3.  The period does not exceed a period of one year

Features:

1. Issuer
2. Finance Bills
3. .Liquidity
4. .Vital Source
5. Monetary 

Management

Types:

On the basis of periodicity, Treasury Bills may be classified into three. They are:

1. 91 days Treasury Bills
2. 182 days Treasury Bills and 3)364 days Treasury Bills

II. Certificate of Deposits:

1.  Certificate of Deposits are short-term deposit instruments issued by banks and financial institutions to raise large sums of money. 
2.  Certificate of Deposits are issued in the form of usance promissory notes.
3.  The Certificate of Deposit is transferable from one party to another.

Features of Certificate of Deposit

1. . Document of title to time deposit
2. . It is unsecured negotiable instruments.
3. . It is freely transferable by endorsement and delivery.
4. . It is issued at discount to face value.
5.  . It is repayable on a fixed date without grace days.

III. Commercial Bills:

A bill of exchange issued by a commercial organization to raise money for short￾term needs. These bills are of 30 days, 60 days and 90 days maturity.

Types of Commercial Bill:

1.  Demand Bills
2.  Clean bills and documentary Bills
3.  Inland bills and Foreign Bills
4.  Indigeneous Bills
5.  Accommodation Bills

4. Explain the features and types of Commercial Bills?

Features

The features of the Commercial Bills are as follows:

1. . Drawer
2. . Acceptor
3. . Payee
4.  Discounter
5. . Endorser
6. . Assessment
7. . Maturity
8. . Credit Rating

Types

a. Demand Bills

1. A demand bill is one wherein no specific time of payment is mentioned. So, demand bills are payable immediately when they are presented to the drawee.

b. Clean bills and documentary Bills

1. Bills that are accompanied by documents of title to goods are called documentary bills. Clean bills are drawn without accompanying any document.

E.g. Railway Receipt and Lorry Receipt 

c. Inland bills and Foreign Bills

1. Bills that are drawn and payable in India on a person who is resident in India are called inland bills. Bills that are drawn outside India and are payable either in India or outside India are called foreign bills.

d. Indigenous Bills

1. The drawing and acceptance of indigenous bills are governed by native custom or usage of trade.

e. Accommodation Bills

1. Accommodation bills are those which do not arise out of genuine trade of transactions.

5. What are the characteristics of Government Securities?

1. Agencies 

• Government securities are issued by agencies such as Central Government, State Governments, semi-government authorities like local Government authorities, e.g. municipalities, autonomous institution such as metropolitan authorities, port trusts etc.,

2. RBI Special Role

• RBI takes a special and an active role in the purchase and sale of these securities as part of its monetary management exercise.

3. Nature of Securities

• Securities offer a safe avenue of investment through guaranteed payment of interest and repayment of principal by the Government. 

4. Liquidity Profile 

• The liquidity profile of gilt-edged securities varies. Accordingly liquidity profile of securities issued by Central Government is high.

5. Issue Mechanism

• The Public Debt Office (PDO) of the RBI undertakes to issue government securities. 

6. Issue opening 

• A notification for the issue of the securities is made a few days before the public subscription is open.

7. Switching 

• The purchase of one security against the sale of another security carried out by the RBI in the secondary market as part of its open market operations is described as ‘Switching’.

8. Auctioning 

• A method of trading whereby merchants bid against one another and where the securities are sold to the highest bidder is known as ‘auctioning’.

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