NCERT Solutions for Class 12th: Ch 10 Financial Markets (MCQ and Short Questions)


Page No. 289

Multiple Choice questions

1. Primary and secondary markets:
a. Compete with each other
b. Complement each other
c. Function independently
d. Control each other
► b. Complement each other

Page No. 290

2. The total number of Stock Exchanges in India is:
a. 20
b. 21
c. 22
d. 23
► d. 23

3. The settlement cycle in NSE is:
a. T + 5
b. T + 3
c. T + 2
d. T+1
► b. T + 3

4. The National Stock Exchange of India was recognized as stock exchange in the year:
a. 1992
b. 1993
c. 1994
d. 1995
► a. 1992

5. NSE commenced futures trading in the year:
a. 1999
b. 2000
c. 2001
d. 2002
► b. 2000

6. Clearing and settlement operations of NSE are carried out by:
c. SBI
► a. NSDL

7. A Treasury Bill is basically:
a. An instrument to borrow short-term funds
b. An instrument to borrow long-term funds
c. An instrument of capital market
d. None of the above
► a. An instrument to borrow short-term funds

Short answer questions

1. What are the functions of a financial market?


• Mobilisation of savings and Channeling them in to the most productive uses.
Facilitating price discovery.
Providing liquidity to financial Assests.
Reducing the cost of transactions.

2. "Money market is essentially a market for short term funds." Discuss.


Money market is a market for short- term funds because it deals in monetary assets whose period of maturity is less than one year. The instrument of money market includes Treasury bill, commercial bill, call money, certificate of deposit, Commercial bills.

3. What is a Treasury Bill?


They are also known as zero coupon bonds issued by the Reserve bank of India on behalf of the central government to meet its short-term requirement of funds.

4. Distinguish between capital market and money market.


Basis of difference Capital market  Money market
Participants The participants in the capital market are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from members of the public. The participation in the money market is by large undertaken by institutional participants such as the RBI, banks, financial institutions and finance companies.
Instruments Equity shares, debentures, bonds, preference shares etc are the main instruments traded in capital market. Short term debt instruments such as T- bills, trade bills reports, commercial paper and certificate of deposit.
Time span of securities  Maturity period is more than one year. The maturity period can vary from one day to a maximum of one year.
Risk Capital market securities involve greater risk in terms of repayment of the principal amount. Money market securities are less risky due to short time period and sound financial position of the issuers.
Returns expected Expected returns are higher due to the possibility of capital gains in long-term and regular dividends or bonus. Expected returns are lower due to shorter duration.

5. What are the functions of a stock exchange?


The function of the stock exchange is:

• Providing liquidity and marketability to existing securities: The main function of the stock exchange is the creation of a continuous market where securities are bought and sold and also it gives investors the chance to disinvest and reinvest.

• Pricing of securities: Price of the stock exchange is determined by the forces of demand and supply.

• Safety of transaction: The membership of a stock exchange is well- regulated and its dealings are well defined according to the legal framework. This ensures that the investing public gets a safe and fair deal.

• Contribution to economic growth: The process of disinvestment and reinvestment saving get channelised into productive investment avenues. This leads to capital formation and economic growth.

• Spreading of equity cult: The stock exchange can play a vital role in ensuring wider share ownership by regulating new issues. Better trading practices and taking effective steps in educating the public about investments.

• Providing scope for speculation: The stock exchange provides sufficient scope within the provisions of law for speculative activity in a restricted and controlled manner.

6. What are the objectives of the SEBI?


The overall objective of SEBI is to protect the interests of investors and regulate the securities market. This may be elaborate as:

• To regulate stock exchanges and the securities industry to promote their orderly functioning.

•  To protect the rights and interests of investors.

• To prevent trading malpractices.

• To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc.

7. State the objectives of the NSE.


The objectives of the NSE –

• Establishing a nationwide trading facility for all types of securities.

• Through an appropriate communication network, ensuring equal access to investors.

• Through electronic trading system, provides a fair, efficient and transparent securities market.

• It enables shorter settlement cycles and book entry settlements.

• Meeting international benchmarks and standards.

8. What is OTCEI?


The OTCEI is a company incorporated under the Companies Act, 1956. 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 fully computerised, transparent, single window exchange which commenced trading in 1992. This exchange is established on the lines of NASDAG the OTC exchange in USA. If has been promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI capital markets and can bank financial services.
It is a negotiated market place that exists anywhere as opposed to the auction market place, represented by the activity on securities exchange. Thus, in the OTC exchange, trading takes place when a buyer or seller walks up to an OTCEI counter, taps on the computer screen, finds quotes and effects a purchase or sale depending on whether the prices meet their target.

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