NCERT Solutions Class 12 Business Studies Chapter 10 Financial Market

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market Objective Type Questions

Question. Primary and Secondary Markets

1. compete with each other.
2. complement each other.
3. function independently.
4. control each other.

Answer: b) complement each other.

Question. Total number of Stock Exchanges in India are

1. 20.
2. 21.

22.

1. 23.

Answer: d) 23.

Question. The settlement cycle in NSE is

1. T + 5.
2. T + 3.
3. T + 2.
4. T + 1.

Answer: c) T+2.

Question. National Stock Exchange of India was recognized as stock exchange in the year.

1. 1992.
2. 1993.
3. 1994.
4. 1995

Answer: b) 1993.

Question. NSE commenced futures trading in the year
Answer: b) 2000.

Question. Clearing and settlement operations of NSE is carried out by
Answer: b) NSCCL.

Question. OTCEI was started on the lines of
Answer: a) NASDAQ.

Question. To be listed on OTCEI, the minimum capital requirement for a company is

1. Rs 5 crores.
2. Rs 3 crores.
3. Rs 6 crores.
4. Rs 1 crores.

Answer: b) ` 3 Crores. Explanation:

Minimum capital required by OTCEI to be registered is ` 3 crores and maximum is ` 50 crores.

Question. Treasury Bills are basically

1. an instrument to borrow short term funds.
2. an instrument to borrow long term funds.
3. an instrument of capital market.
4. none of the above.

Answer: a) an instrument to borrow short term funds.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market Short Answer Type Questions

Question. What are the functions of financial markets?
Answer: Functions of financial markets are:

1. Mobilisation of Savings: It gives savers the choice of different investments and thus helps to channelise surplus funds into the most productive use.
2. Facilitate Price Discovery: In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
3. Provide Liquidity to Financial Assets: Financial markets facilitate easy purchase and sale of financial assets. In doing so they provide liquidity to financial assets, so that they can be easily converted into cash whenever required.
4. Reduce the Cost of Transaction: Financial markets provide valuable information about securities helps to save time, effort and money.

Question. “Money Market is essentially Market for short term funds” Discuss.
Answer: Money market is a market which deals in monetary assets whose period of maturity is up to 1 year. This makes these assets highly liquid.

Thus, money market helps in raising short term funds, for meeting temporary shortages in cash and also for temporary deployment of excess funds available, for earning returns.

Important money market instruments are:

1. Call money
2. Treasury Bills
3. Commercial Papers
4. Certificate of Deposit
5. Commercial Bills

Question. What is Treasury Bill?
Answer: Treasury bill is the short term instrument which the Central Government issues to the financial institutions or the general public in order to meet its short term financial needs. Its maturity period cannot be more than a year. It is issued by the RBI on behalf of the government.

Question. Distinguish between Capital Market and Money Market.
Answer: Difference between Capital Market and Money Market:

Basis	Capital Market	Money Market
Meaning	The market	The market
dealing in the long	dealing in short
term funds is	term funds is
known as capital	known as
market.	money market.
Amount of	Not huge as value	Huge as

 

Investment	of securities is less	instruments are
expenditure	expensive
Major	Companies, stock	RBI,
Participants	exchanges,	Commercial
commercial banks,	banks, non-
financial	banking finance
institutions, retail	companies,
investors, etc	mutual funds,
etc
Securities	Equity shares,	Treasury bills,
traded	debentures,	commercial bills
bonds, etc	commercial
paper, call
money, etc
Safety	Risky in terms of	Much safer,
both capital	since for short
invested & returns	period & issued
thereon	by banks,
government
etc.
Rate of	Rate of interest in	Rate of interest
interest	this market is	is generally low
generally higher

Question. What are the functions of Stock Exchange?
Answer: The functions of a stock exchange are:

Providing liquidity and marketability of securities – Stock exchange creates continuous market for buying and selling of securities by giving chance to investors for investing and disinvesting their securities.

Pricing of securities – Stock exchange is a mechanism of constant valuation through which the prices of the securities are determined. The share prices are determined by the forces of demand and supply. Safety of transactions – Stock exchange ensures fair and safe deal on the market as only listed companies can trade their securities through this.

Contributes to Economic Growth – Stock exchange helps investors in investing and reinvesting their savings. This helps in channelising the savings in productive use which in turns lead to capital formation and economic growth.

Spreading of equity cult – Stock exchange ensures wider share ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investment.

Question. What are the objectives of SEBI?
Answer: The objectives of SEBI are:

• To regulate stock exchanges through framing of rules and regulations and code of conduct to regulate intermediaries such as brokers, bankers, underwriters, etc.

• To keep a check on the activities of the brokers and other middlemen in order to regulate any unfair trade practices in the capital market.

• 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 statutory 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.

Question. What are the objectives of NSE?
Answer: NSE was set up with the following objectives:

1. Providing a fair, efficient and transparent securities market using electronic trading system.
2. Establishing a nationwide trading facility for all types of securities.
3. Enabling shorter settlement cycles and book entry settlements.
4. Meeting international benchmarks and standards.
5. Ensuring equal access to investors all over the country through an appropriate communication network.

Question. What is OTCEI?
Answer: OTCEI was set up to address the needs of small business organisations. It is termed as a second tier exchange for small investors. OTCEI was incorporated in 1992 to provide listing facility for small companies with paid up capital of less than ` 3 crores. Over the counter market may be defined as a place where buyers seek sellers and vice-versa. The objectives of OTCEI are to provide quicker liquidity to securities at a fixed and fair price, liquidity for less traded securities or that of small companies, a simplified process of buying and selling and easy and cheaper means of making public sale of new issues.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market Long Answer Type Questions

Question. Explain the various Money Market Instruments.
Answer: Call Money: Call money is short term finance repayable on demand with a maturity period of one day to fifteen days, used for inter bank transactions. It is a method by which banks borrow from each other to maintain the cash reserve ratio. Cash reserve ratio is the minimum cash balance which banks have to maintain. The interest rate paid on call money loans is known as the call rate. Treasury Bill: Treasury bill is the short term instrument which the Central Government issues to the financial institutions or the general public in order to meet its short term financial needs. Its maturity period cannot be more than a year. It is issued by the RBI on behalf of the government.

Commercial Paper: Commercial papers are those unsecured promissory notes which are issued by reputed companies. Their buyers are banks, insurance companies, unit trust and firms. The minimum face value of a commercial paper is five lakh rupees. It is used to meet the demand of a short term seasonal need and requirement of working capital.

Certificate of Deposit: refers to a time deposit or fixed deposit which can be sold in the secondary market. Only a bank can issue Certificate of Deposit.

Commercial Bill: A commercial bill is a bill of exchange used to finance the working capital requirements of business firms.

Question. What are the methods of floatation in Primary Market.
Answer: The various methods of floatation of new issues in the primary market are:

• Offer through prospectus – Under this method, a company, through issue of prospectus, invites public to subscribe to its shares. It makes direct appeal to investors to raise funds. Prospectus should contain the provisions, as required by Companies’ Act and SEBI guidelines.

• Offer for Sale – Under this method securities are offered for sale to public through intermediaries like stock brokers and by issuing houses. The company sells securities to brokers, who in turn resell the securities to the investing public.

• Private Placement – Under this method the company allots securities to institutional investors and to some selected individuals. This is a cost effective and quicker way to raise funds.

• Right Issues – Under this, the company issues the new shares to the existing shareholders. The shareholders are offered the right to buy the new shares in proportion to the number of shares they already possess.

• e – IPOs – When a company issues share to the public through the on-line system of the stock exchange it is called electronic initial public offer. The issuer company can apply for listing of its securities on any exchange other than the exchange through which it has offered its securities earlier.

Question. Explain the Capital Market reforms in India.
Answer: Capital market refers to facilities and institutional arrangements through which long-term funds, both debt and equity are raised and invested. It can be divided into two parts: a. Primary Market and b. Secondary market. First stock exchange was set up in India in 1875 that was later named as Bombay Stock Exchange. After the reforms of 1991, Stock market in India acquired three tier systems: Regional stock exchange, national stock exchange and OTCEI.

Regional stock exchange: First regional stock exchange was set up in Ahmadabad. Later on stock exchanges were set up in Calcutta, Madras, Delhi, Hyderabad and Indore. Currently there are 22 regional stock exchanges.

National stock exchange: It started operations in 1994, with trading on the wholesale debt market segment. The NSE was setup by leading financial institutions, banks, insurance companies and other financial intermediaries. It is managed by professionals, who do not directly or indirectly trade on the exchange.

Over the counter exchange of India: It was set-up to provide small and medium companies an access to the capital market for raising finance in a cost effective manner. It is defined as a place where buyers seek sellers and vice-versa and then attempt to arrange terms and conditions for purchase/sale acceptable to both the parties.

Question. Explain the objectives and functions of SEBI.
Answer: SEBI was set up in 1988 to regulate the functions of the securities market with a view to promote their orderly and healthy development, to provide adequate protection to investors and thus, create an environment to facilitate mobilisation of adequate resources through the securities market.

Objectives of SEBI:

• To regulate stock exchanges through framing of rules and regulations and code of conduct to regulate intermediaries such as brokers, bankers, underwriters, etc.

• To keep a check on the activities of the brokers and other middlemen in order to regulate any unfair trade practices in the capital market.

• 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 statutory 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.

Functions of SEBI:

Protective Functions.

1. To prohibit fraudulent and unfair trade practices in the securities market.
2. To prohibit insider.
3. To educate investors.
4. To promote fair practices and code of conduct in securities market.

Developmental Functions:

1. To promote training of intermediaries of the securities market.
2. To develop capital markets by adapting a flexible approach.

Regulatory functions:

1. SEBI has framed rules and regulations and code of conduct to regulate the intermediaries such as brokers, bankers, underwriters etc.
2. Controlling insider trading and takeover bids.
3. It registers the working of mutual funds.
4. It conducts inquiries and audit of stock exchange.
5. Prohibition of fraudulent and unfair trade practices.

Question. Explain the various segments of NSE.
Answer: NSE has two main segments:

• Whole sale debt market segment: This provides a trading platform for fixed income securities such as central government securities, treasury bills, state development loans, bonds issued by public sector undertakings, etc.

• Capital Market Segment: It provides an efficient and transparent platform for trading in equity, preference, debentures, etc.

Case Problem I: ‘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 to easy availability of loans and accompanying tax concessions. To expand its business in India and abroad the company is weighing 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? Whether to raise the necessary financé 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.

Question. What benefits will the company derive from listing at NSE?
Answer: Benefits that the company will derive from listing at NSE are:

1. This ensures shorter settlement cycle and book entry system.
2. It also provides safety.
3. It would also ensure that investors would get easy access to the securities.

Question. What are the regulations of SEBI that the company must comply with?
Answer: To issue shares/ debentures company must comply with following regulations of SEBI:

1. It shall issue prospectus giving all the important information about the issue.
2. Subscription shall be open for minimum 3 days and maximum 10 days.
3. No agent shall be appointed for collecting the call money.
4. Minimum subscription money received on application shall be 90%.

Question. How does the SEBI exercise control over ‘R’ Limited in the interest of investors?
Answer: SEBI shall exercise control in following manner:

1. Conduct inquiries and audit of stock exchange.
2. Prohibit fraudulent and unfair trade practices.
3. Prohibit insider.
4. Educate investors.
5. Promote fair practices and code of conduct in securities market.

Questions:

Question. What do you mean by a stock index? How is it calculated?
Answer: Stock index reflects the change in price of various securities during a period of time. This can be calculated by any of the three methods:

1. Price weighted index.
2. Equal weighted index.
3. Value weighted index.

Question. What conclusions can you draw from the various movements of NSE stock indices?
Answer: There is fall in the index in all sectors. This suggests the situation of depression in market.

Question. What factors affect the movement of stock indices? Elaborate on the nature of these factors.
Answer: Factors that affect the movement of stock indices are: Political conditions in the country: In stable political environment stock index shows positive movements. Financial position of countries: Sound financial position of other countries positively affect stock indexes. Government policies: Liberal policies boost economic activity of a country and thus positively affects the stock index of a country.

Question. What relationship do you see between the movement of indices in world markets and NSE indices?
Answer: Indices in the world market and NSE indices move together in one direction.

Question. Give details of all the indices mentioned above. You can find information on the web or business magazines.
Answer: The indices mentioned above are:

1. S&P CNX Nifty: It is NSE. It is managed by Indian index services and products.
2. CNX Nifty Junior: As with the CNX Nifty, stocks in the this are filtered for liquidity, so they are most liquid of the stocks excluded from CNX Nifty.
3. CNX IT: It consists of IT stocks that are more liquid. Bank Nifty: Bank Nifty is the bank index traded in the F&O segment of NSE. It comprises of most liquid banking stocks listed on NSE.
4. CNX 100: This comprises 100 stocks. It is managed by Indian index services and products.
5. NYSE composite: It is listed on New York Stock exchange.
6. NASDAQ composite: It is not just limited to stocks of companies having US headquarters.
7. Dow Jones IA: The price is weighted average of 30 stocks traded on NASDAQ.
8. S&P 500: This consists of 500 companies that are commonly listed on New York Stock exchange. Nikki 225: This is a Japanese stock index listed on Tokyo Stock Exchange.

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market Objective Type Questions

Question. Which of the following are the mechanisms through which allocation of funds can be done
(a) Banks (b) Financial markets
(c) Both (a) and (b)
(d) None of these 
Answer: C

Question. The money market is a market for short term funds which deals in monetary assets whose period of maturity is
(a) Upto one year
(b) Up to six months
(c) Up to three months
(d) None of these 
Answer: A

Question. The National Stock Exchange was incorporated in
(a) 1992
(b) 1993
(c) 1991
(d) 1996
Answer: A

Question. Which of the following is the function of stock exchange.
(a) Providing Liquidity and Marketability to Existing Securities
(b) Spreading of Equity Cult
(c) Contributes to Economic Growth
(d) All of the above 
Answer: D

Question. Which of the following money market instruments are also known as Zero Coupon Bonds.
(a) Call Money
(b) Treasury Bill
(c) Commercial Paper
(d) Commercial Bill
Answer: B

Question. The Securities and Exchange Board of India was established by the Government of India on
(a) 12 April 1989
(b) 12 April 1988
(c) 12 April 1987
(d) 12 April 1986 
Answer: B

Question. The SEBI was given a statutory status on ____________through an ordinance.
(a) 30 January 1992
(b) 30 March 1992
(c) 30 April 1992
(d) 30 June 1992 
Answer: A

Question. Which of the following is an objective of SEBI
(a) To regulate stock exchanges and the securities industry to promote their orderly functioning
(b) To protect the rights and interests of investors
(c) To prevent trading malpractices
(d) All of the above
Answer: D

Question. ________________ is short term finance repayable on demand, with a maturity period of one day to fifteen days
(a) Call Money
(b) Treasury Bill
(c) Commercial Paper
(d) Commercial Bill 
Answer: A

Question. Which of the following statement is true for primary market
(a) The primary market is also known as the new issue market
(b) It deals with new securities being issued for the first time.
(c) The essential function of a primary market is to facilitate the transfer of investment funds from savers to entrepreneurs
(d) All of the above
Answer: D

Question. Which of the following statement is false for financial market?
(a) Financial markets facilitate difficulty in the purchase and sale of financial assets.
(b) Financial markets provide valuable information about securities being traded in the market.
(c) They provide liquidity to financial assets.
(d) None of these 
Answer: A

Question. In which of the following methods of floating new issues in the primary market securities are not issued directly to the public but are offered for sale through intermediaries.
(a) Offer for Sale
(b) Private Placement
(c) Offer through Prospectus
(d) Right Issue 
Answer: A

NCERT Solutions for Class 12 Business Studies Chapter 10 Financial Market One Word Answer Type Questions :

Question. SEBI recently called for information and issued a show cause notice to NSE and its 14 officials seeking explanation on the Preferential Access allegations at the Exchange’s co-location facility. State the function that SEBI performed by doing so.
Answer: Regulatory Function.

Question. ABC Ltd. issued prospectus for the subscription of its shares for ₹ 500 crores in 2008. The issue was oversubscribed by 20 times. The company issued shares to all the applicants on pro-rata basis. Later, SEBI inspected the prospectus and found some misleading statement about the management of the company in it. SEBI imposed a penalty of ₹ 5 crores and banned its three executive directors for dealing in securities market for three years. Identify the function and its type performed by SEBI in the above case.
Answer: Protective function.

Question. Reshu’s father has gifted her shares of a large cement company, with which he had been working. The securities were in physical form. She already has a bank account and does not possess any other forms of securities. She wished to sell the shares and approached a registered broker for the purpose. Mention one mandatory detail which she will have to provide with the broker.
Answer: Permanent Account Number (PAN).

Question. Mahindra Bank wants short term finance for only one or two days. What option should it pick ?
Answer: Call money option.

Question. Madhu Ltd. want to issue its share first time in share market. So Madhu Ltd. should go with primary market or secondary market ? 
Answer: Primary Market.

Question. Himanshu had 55 shares of Vani Ltd. He wanted to sell 30 shares, so he went to a specific market to sell them. Write the name of the market where he went to sell them ?
Answer: Secondary Market.

Question. Meca Ltd., a reputed automobile manufacturer, needs Rupees ten crores as additional capital to expand its business. Atul Jalan, the CEO of the company, wanted to raise funds through equity. On the other hand the Finance Manager, Nimi Sahdev
said that the public issue may be expensive on account of various mandatory and non-mandatory expenses. Therefore, it was decided to allot the securities to institutional investors. Name the method through which the company decided to raise additional capital.
Answer: Private Placement.

Question. Sika Ltd., a reputed industrial machines manufacturer, needs Rupees twenty crores as additional capital to expand the business. Mr. Amit Joshi, the Chief Executive Officer (CEO) of the company wants to raise funds through equity. The Finance Manager, Mr. Narender Singh, suggested that the shares may be sold to investing public through intermediaries, as the same will be less expensive. Name the method through which the company decided to raise additional capital.
Answer: Offer for Sale.

Question. Himanshu Ltd. wants to invest in Treasury Bills issued by RBI. Write the minimum amount that can be invested in Treasury Bills ? 
Answer: ₹ 25,000.

Question. ‘Vani Oil Refinery’ is a large company, engaged in processing crude oil and refining it into more useful products like Petroleum, Kerosene, LPG etc. It has build good reputation over the years. It has been consistently earning profits and paying regular dividend to its shareholders. It needs additional working capital immediately to finance a project. It expects to return this amount after seven to eight months. Ashish Batra, the Finance Manager of the company does not want to get into procedural requirements of securing finance from a Commercial Bank. Suggest any one way the company can raise the required finance for meeting its additional working capital requirements.
Answer: Commercial Paper.