Tag: Money Market

TN State Board Kalvi 12th Commerce Notes Chapter 6 Money Market

Question 1.
Define the term “Money Market”.
Answer:
Money market for purely short term funds. It deals with the financial assets and securities whose maturity period does not exceed one year.
Eg: Treasury Bills, Commercial Bills.

Question 2.
What is commercial bill market?
Answer:
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. The commercial bill is an instrument drawn by a seller <jf goods on a buyer of goods.

Question 3.
What is a CD market?
Answer:
Certificate of Deposits are short term deposit instruments issued by banks and financial institutions to raise large sum of money. Certificate of deposits are issued in the form of usance promissory notes. They are easily convertible in nature and are in marketable form having particular face value and maturity.

Question 4.
What is Government Securities Market?
Answer:
A market where by the Government or gilt – edged securities can be bought and sold is called “Government securities market”. Government securities are issued for the purpose of refunding the maturing securities for advance refunding securities which have not yet matured and for cash financing.

Question 5.
What are the Instruments of Money Market?
Answer:

1. Treasury bills in the treasury market
2. Money at call and short notice in the call loan market
3. Commercial bills and promissory notes in the bill market
4. Commercial papers
5. Certificate of deposits
6. Interbank participation certificates
7. Repo instruments.

Question 6.
Explain the two oldest money markets.
Answer:
The two oldest money markets are
(i) London Money Market
(ii) New York Money Market.

(i) London Money Market is the oldest and most developed leading money market in the world.
(ii) New York Money Market is ranked as the second well developed money market in the world next only to the London money market.

Question 7.
What do you meant by Auctioning?
Answer:
A method of trading whereby merchants bid against one another and where the securities are sold to the highest bidder is known as “auctioning”.

Question 8.
What do you meant by Switching?
Answer:
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 operation is described as “switching”.

Question 9.
What are the features of Treasury Bills?
Answer:
A treasury bill is nothing but a promissory note issued for a specific period stated there in. The period does not exceed a period of one year. Treasury bills incorporate the following features:

1. Issues
2. Finance Bills
3. Liquidity
4. Vital source
5. Monetary management

Question 10.
Who are the participants of Money Market?
Answer:
There are many participants operating in the 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
8. Commercial Banks
9. State Governments
10. Public

Question 11.
Explain the types of Treasury Bills.
Answer:
Treasury Bills are issued to the public and other financial institutions for meeting the short term financial institutions for meeting the short term financial requirements of the Central Government. These bills are freely marketable and they can be bought and sold at anytime and these bills are tradable in secondary market as well.
On the basis of periodicity Treasury bills may be classified into three. They are:
(i) 91 days Treasury Bills
(ii) 182 days Treasury Bills
(iii) 364 days Treasury Bills

Ninety one days Treasury Bills are issued at a fixed discount rate of 4 percent as well as through auctions. The RBI holds 91 days and 182 days Treasury Bills and they are issued on tap basis throughout the week, 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.

Question 12.
What are the features of Certificate of Deposit?
Answer:
Certificate of deposits are short term deposit instruments issued by banks and financial institutions.
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.

Question 13.
What are the types of Commercial Bill?
Answer:
A bill of exchange issued by a commercial organization to raise money for short term needs. These bills are 30 days, 60 days and 90 days maturity.
Types of commercial bills:
(i) Demand and usance bills:
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.

(ii) Clean Bills and Documentary Bills:
Bills that are accompanied by documents of title of goods are called documentary bills. Clean bills are drawn without accompanying any document.

(iii) Inland bills and Foreign bills:
(a) Bills that are drawn and payable in India on a person who is a resident in India are called Inland bills.
(b) Bills that are drawn outside India and are payable either in India or outside India are called Foreign bills.

(iv) Indigeneous Bills:
The drawing and acceptance of indigeneous bills are governed by native custom or usage of trade.

(v) Accommodation and supply Bills:
Accommodation bills are those which do not arise out of genuine trade of transactions.

Question 14.
Define Money Market and Capital Market. Explain the difference between the Money Market and Capital Market.
Answer:
Money Market:
Money market is a market for purely short term funds. It deals with the financial assets and securities whose maturity period does not exceed one year.

Capital market:
Capital market can be defined as ‘a market for borrowing and lending of long term capital funds required by business enterprises” capital market offers on ideal source of external finance.

Question 15.
Explain the characteristics of Money Market.
Answer:
(i) Short term funds:
It is a market purely for short-term funds or financial assets called near money.

(ii) Maturity period:
It deals with financial assets having a maturity period up to one year only.

(iii) Conversion of cash:
It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost.

(iv) No formal place:
Transactions take place through phone (oral communication). There is no formal place like stock exchange as in the case of a capital market.

(v) Sub-market:
It is not a single homogeneous market. It comprises of several sub-markets such specializing in a particular type of financing.
Eg: call money market, bill market.

(vi) Existence of secondary market:
There should be an active secondary market for these instruments.

(vii) Highly organized banking system:
The commercial banks are the nerve centre of the whole money market. They are the principal suppliers of short term funds.

(viii) Demand and supply of funds:
There should be a large demand and supply of short-term funds. It pre supposes the existence of a large domestic and foreign trade.

(ix) Wholesale market:
It is a wholesale market and the volume of funds or financial assets traded in the market is very large.

Question 16.
Explain the Instruments of Money Market.
Answer:
There are many kinds of instruments available in money market. In India till
1986 only a few instruments were available. They were as follows:-
(i) Treasure bills in the Treasury market
(ii) Money at call and short notice in the call loan market.
(iii) Commercial bills and promissory notes in the Bill market.

Now in addition to the above the following new instruments come into existence.
(i) Commercial papers
(ii) Certificate of deposits
(iii) Inter bank participation certificates
(iv) Repo instruments

Question 17.
Explain the features and types of Commercial Bills.
Answer:
Features of Commercial bills:

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

Types of commercial bills:

(i) Demand and usance bills:
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.

(ii) Clean bills and documentary bills:
Bills that are accompanied by documents of title to goods are called documentary bills. Clean bills are drawn without accompanying any documents.
Eg: Railway receipt and lorry receipt

(iii) Inland bills and foreign bills:
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 payable either in India or outside India are called foreign bills.

(iv) Indigeneous bills:
The drawing and acceptance of indigeneous bills are governed by native custom or usage of trade.

(v) Accommodation and supply bills:
Accommodation bills are those which do not arise out of genuine trade of transactions.

Question 18.
What are the features of Government Securities?
Answer:
A market where by the Government or gilt -edged securities can be bought and sold is called Government securities market.

Features of Government securities:
(i) Agencies:
Government securities are issued by agencies such as central Government, state Government and local Government authorities.
Eg: Municipalities, autonomous institutions such as metropolitan authorities, port trust etc.

(ii) 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.

(iii) Liquidity profile:
According to liquidity profile of securities issued by central Government is high.

(iv) Tax rebate:
They offer wide-range of tax incentives to investors.

(v) Forms:
The securities of central and state Government take such forms as inscribed stock or stock certificate promissory note and bearer bond.

(vi) Trading:
The secondary market for Government securities is narrow, small and less active, banks and corporate holders who purchase and sell Government securities on the stock exchanges participating in trading.

(vii) Issue mechanism:
A notification for the issue of the securities is made a few days before the public subscription is open.

(viii) 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.

(ix) Auctioning:
A method of trading where by merchants bid against one another and where the securities are sold to the highest bidder is known as “auctioning”.

Choose the correct answer:

Question 1.
The money invested in the call money market provides high liquidity with:
(a) Low Profitability
(b) High Profitability
(c) Limited Profitability
(d) Medium Profitability
Answer:
(a) Low Profitability

Question 2.
A major player in the money market is the:
(a) Commercial Bank
(b) Reserve Bank of India
(c), State Bank of India
(d) Central Bank
Answer:
(a) Commercial Bank

Question 3.
Money Market provides:
(a) Medium-term Funds
(b) Short-term Funds
(c) Long-term Funds
(d) Shares
Answer:
(b) Short-term Funds

Question 4.
Money Market Institutions are:
(a) Investment Houses
(b) Mortgage Banks
(c) Reserve Bank of India
(d) Commercial Banks and Discount Houses.
Answer:
(d) Commercial Banks and Discount Houses.

Question 5.
Risk in the Money Market is:
(a) High
(b) Market Risk
(c) Low Credit and Market Risk
(d) Medium Risk
Answer:
(c) Low Credit and Market Risk

Question 6.
Debt Instruments are issued by Corporate Houses are raising short-term financial resources from the money market are called:
(a) Treasury Bills
(b) Commercial Paper
(c) Certificate of Deposit
(d) Government Securities
Answer:
(b) Commercial Paper

Question 7.
The market for buying and selling of Commercial Bills of Exchange is known as a:
(a) Commercial Paper Market
(b) Treasury Bill Market
(c) Commercial Bill Market
(d) Capital Market
Answer:
(c) Commercial Bill Market

Question 8.
A marketable document of title to a time deposit for q specified period may be referred to as a:
(a) Treasury Bill
(b) Certificate of Deposit
(c) Commercial Bill
(d) Government Securities
Answer:
(b) Certificate of Deposit

Question 9.
Treasury Bills commands:
(a) High Liquidity
(b) Low Liquidity
(c) Medium Liquidity
(d) Limited Liquidity
Answer:
(a) High Liquidity

Question 10.
Government Securities are issued by agencies such as:
(a) Central Government
(b) State Governments
(c) Semi-Government Authorities.
(d) All of the above.
Answer:
(d) All of the above

TN Board 12th Commerce Important Questions