Financial Market

Question 1

Concept of financial market

Answer 1

A business is a part of an economic system that consists of two main sectors – households which save funds and business firms which invest these funds. A financial market helps to link the savers and the investors by mobilizing funds between them. In doing so it performs what is known as
an allocative function.

Question 2

Financial intermediation

Answer 2

It is the process by which the allocation of funds is done. Households can lend money to bank and they can lend money to the businesses. Alternatively households can buy shares and debentures from the business firms through financial markets.

Question 3

Functions of financial market ?

Answer 3

1. Mobilisation of savings and channeling them into the most productive uses
2. Facilitating price discovery
   3.Providing liquidity to financial assets
3. Reducing the cost of transaction

Question 4

Money market

Answer 4

It is a market for the short term funds which deals in monetary assets whose maturity period is up to 1 year. Unsecure, low risk and short term debt are issued. No physical location but it is conducted over telephone or internet for meeting temporary shortage of cash. Major participant is RBI, commercial banks and mutual funds.

Question 5

Instruments of money market ?

Answer 5

1. Treasury bills
2. Commercial paper
3. Call Money
4. Certificate of deposit
5. Commercial bill

Question 6

Distinction between money and capital market

Answer 6

1. Participants
2. Instruments
3. Investment layout
4. Duration
5. Liquidity
6. Safety
7. Expected return