Unit IV

Capital Market

Question bank

Q1) What is capital market? Write its function.     5

A1. Capital markets are used to mean markets for long-term investments that have explicit or implicit claims about capital. Long-term investments are investments that have a lock-in period of more than one year.

The capital markets buy and sell both equity and debt products such as equity stocks, preferred stocks, and corporate bonds, zero coupon bonds and collateralized premium bonds, including all forms of lending and borrowing.

Capital markets consist of institutions and mechanisms that combine medium- to long-term funds to make them available to individuals, businesses and governments. It includes both private placement sources and organized markets such as the stock exchange.

Capital market function

From a broader perspective, capital markets are considered to be markets for long-term or infinite financial assets, but in reality they play a very important role in mobilizing resources and allocating them to productive channels. I will do it. Therefore, it can be said that the process of economic growth of a country is facilitated by capital markets. The key features and importance of the market are described below. – –

1. Economic Growth: Capital markets help accelerate the process of economic growth. It reflects the general state of the economy. Capital markets help to properly allocate resources from those who have surplus capital to those who need it. Therefore, it can help expand both public and private industries and trade, which will lead to balanced economic growth in the country.

Learn the basics of trading on a simple course of stock markets by market experts

2. Promotion of savings habits: After the development of capital markets, tax systems and banking institutions will provide investors with equipment and facilities to save more. In the absence of capital markets, they may have invested in unproductive assets such as land or gold, or indulged in unnecessary spending.

3. Stable and systematic security price: Apart from mobilizing funds, Capital Markets helps to stabilize the price of stocks. Reducing speculative activity and providing capital to borrowers at low interest rates helps stabilize securities prices.

4. Availability of funds: Investment continues in the capital markets. Both buyers and sellers interact through online platforms to trade capital and assets. Stock exchanges like NSE and BSE provide a platform for this, making it easier to trade in the capital markets.

Q2) Explain the two types of capital market?     5

A2. The two types of capital market are:

1. Primary market
2. Secondary market

1. Primary market- In the primary market, securities are created for the first time for investors to buy. New securities are issued through the stock exchange in this market, allowing businesses as well as governments to raise funds.

Three entities are involved in the transactions that take place in this market. This includes companies, investors, and underwriters. Companies issue securities in the primary market as initial public offerings (IPOs), and the selling price of such new issuance is determined by the relevant underwriters, who may or may not be financial institutions. Underwriters also facilitate and monitor the provision of new issues. Investors buy newly issued securities in the primary market. Such markets are regulated by the Securities and Exchange Commission of India (SEBI).

The entity issuing the securities may be looking to expand its business, fund other business goals, or, among other things, increase its physical presence. Examples of primary markets for issued securities include bills, bills, government or corporate bonds, and corporate stock.

b.    Secondary market- A secondary market is defined as a market in which previously issued financial instruments are bought and sold. These include futures, options, bonds, stocks, and loans sold to investors by mortgage banks.

In some cases, the secondary market is used to represent a market for assets or second-hand goods, or an alternative use by an existing product.

Meaning

Simply put, the secondary market is described as a financial market where securities already owned by investors are bought and sold. Some other names that seem familiar to the secondary market

One of the most popular securities is stocks, in addition to these, there are other types of secondary markets. Investment banks can handle the buying and selling of bonds and investment trusts as well as individual and corporate investors.

For the average investor, it is an efficient market for securities trading, and for companies, it is a monitoring and control channel.

Q3) What are the functions of secondary market?     5

A3. Now, in order to understand the characteristics and functions of the stock market, we first need to understand its meaning. The secondary market is a place where investors can freely buy and sell stocks without disturbing the issuing company.

The secondary market is also known as the stock market and aftermarket.

In other words, the aftermarket, stock market, or secondary market is a platform for trading or trading (buying or selling) securities or stocks that an investor already owns.

Here, securities are traded between one investor and another.

The issuer of such securities is not involved or participated in these transactions or transactions. Therefore, the income in this market comes from the sale of shares from one investor to another.

The basic function of the secondary market is the buying and selling of securities between investors who do not have the role of an issuer.

The secondary market regulator is the Indian Securities and Exchange Commission, SEBI, which protects the interests of entities or parties operating in the secondary market, such as individual investors and financial intermediaries.

Let us summarize the functions of the secondary market in the following points.

The secondary market serves as a reliable economic barometer because it shows the state of the economy and its impact on stocks and stock prices reflects the changes that occur in the economy. Otherwise, the secondary market continues to check for economic pulsations.

Valuation of securities can be based on factors such as supply and demand. The stock market, which is a mirror of the economy, helps us find the value of financial instruments.

The secondary market is an economy as securities / financial products are traded on the stock exchange and the entire process of reinvestment and withdrawal supports investment in the most productive investments that lead to capital formation and thus economic growth. Contribute to growth.

Another function of the secondary market is to provide security for transactions and transactions because the secondary market is operated by rules and regulations.

We provide better trading practices to facilitate investment in proprietary financial securities.

The function of the secondary market is to secure and create liquidity for investors.

The main function that the secondary market performs is to provide a reserve market for the purpose of buying, selling or trading financial instruments or securities.

The secondary market helps to allocate investor capital to profitable channels.

The secondary market teaches savings and investment habits. That's because it offers attractive options for investors to invest in various financial securities to make a profit using idle money.

Q4) Write the features of Primary market? What are its types?  8

A4. Primary market features

Some of the key features of the primary market are:

1. New issue offer

This is one of the major primary market features. It is this market that organizes the offering of new stocks that have never been traded on other exchanges. This is why the primary market is also called the new issue market.

Many things are involved in issuing new offers. This includes a detailed assessment of the feasibility of the project, and among the financial arrangements for that purpose, consider, among other things, the promoter's debt-capital ratio, liquidity ratio, and capital adequacy ratio. It is included.

b.    Underwriting service

One of the most important and important aspects of offering a new issue offer is underwriting. The role of the underwriter in key markets is to buy unsold stock. Financial institutions often act as underwriters and earn commissions in the process.

Investors often rely on underwriters to determine if taking risks is worth the return. The underwriter may also buy the entire IPO issue and then sell it to the investor.

c.     Distribution of new publications

This is another important feature of the primary market. The distribution process begins with a new prospectus issue.

The new issue will be purchased by the general public, and we will send you detailed information about the company and issue together with the underwriting company.

Types of issuance in the primary market

Once a security is issued, investors can buy it in a variety of ways in the primary market. They are:

1. Public issue

This is one of the most common ways to issue securities to the general public. Primarily through an initial public offering (IPO) where a company raises capital for its business, then the securities are listed on the stock exchange for trading.

One of the characteristics of the primary market is that a limited company can become a listed company through an IPO. The capital raised by a company can also be deployed to improve the company's existing infrastructure and repay its debt. It also improves corporate liquidity.

The Securities and Exchange Commission of India (SEBI) is the oversight body that oversees IPOs, and appropriate investigations are conducted to establish their credibility before companies seek an IPO.

b.    Private placement

Private placement occurs when a company offers securities to a small group of investors. These primary securities can be stocks, bonds, or other types of securities. In a private placement, the investor is either an institutional investor or an individual investor.

Issuing a private placement is easier than an IPO, as there are significantly fewer regulatory standards. It also saves cost and time. Private placement is more suitable for companies that have just started their business and are in the process of forming it.

c.     Priority

This is one of the quickest ways for a company to raise money for a business. Here, both listed and unlisted companies can issue securities to a particular selected group of investors.

It is important to note that the priority issue is neither a public issue nor a rights issue. In this type of issue, preferred shareholders are paid dividends before ordinary shareholders.

d.    Eligible institutional placement

This is another type of financing tool that listed companies use to raise funds by issuing primary securities to qualified institutional investors (QIBs). SEBI, a capital market regulator, was introduced to help businesses raise funds in the domestic market.

Please note that QIB is an investor who has the necessary expertise and financial knowledge to invest in the capital markets. They are generally foreign institutional investors registered with SEBI, public financial institutions, and upcoming commercial banks.

e.     Rights and bonus issues

This is another type of issuance in the primary market. Here, the company issues securities to existing investors by buying more securities at a fixed price (in the case of a rights issue) and making additional share allocations available for bonus issuance.

In the case of a rights issue, investors can choose to buy shares at a discounted price within a specific period of time. On the other hand, in the case of bonus issuance, the company's shares are issued to existing shareholders.

Q5) Discuss the difference between primary market and secondary market.                                                                                                                                                                        5

A5. The difference between the primary and secondary markets is primarily related to the organization involved in the nature of financing. The basic differences between the two types of markets are:

1. Securities previously issued on the market are called the primary market, but when a company is listed on an authorized stock exchange for trading, the shares are traded on the secondary market.
2. The primary market is also known as the new issue market and the secondary market is known as the post-issue market. Secondary market prices vary depending on the supply and demand of the securities traded. Prices are fixed while in the primary market.
3. The primary market funds the expansion and diversification of old and new businesses, while the secondary market does not fund the businesses because they are not involved in the transaction.
4. In the primary market, investors can buy stocks directly from the company, while in the secondary market, investors buy and sell securities (stocks and bonds) between themselves.
5. In the primary market, investment bankers sell. Conversely, in the secondary market, the broker acts as an intermediary while the transaction is taking place.
6. In the primary market, the company will benefit from the sale of securities. While in the secondary market, investors will benefit from securities.
7. Primary market securities can only be sold once, while secondary market securities can be sold indefinitely.
8. The amount received from the securities becomes the capital of the company, but in the secondary market, the same is the income of the investor.
9. Therefore, from the above points, we conclude that two financial markets (primary market and secondary market) play a major role in mobilizing funds in the country's economy. The primary market facilitates direct interaction with companies and investors. The secondary market, on the other hand, is where brokers help investors buy and sell stocks among other investors.

The process of buying equity in the secondary market is very simple. To buy or sell stock on the secondary market, follow these steps:

1. Open a demat account with a depositary participant (DP).
2. Open a trading account with a broker.
3. Link your bank account to demat and trading accounts.
4. Brokers buy and sell stocks by placing orders on electronic terminals provided by the stock exchange.
5. The broker issues a contract detailing the value of the stock purchased and the cost of the broker.
6. The broker collects the stock through the settlement process (T + 1) and pays on behalf of the investor.
7. The order will be executed on the last settlement date (T + 2).

Q6) Write the functions of stock exchange.      5

A6. Having an idea of ​​the functioning of a stock exchange can be very beneficial in the modern world. The stock exchange is an important part of the modern financial and business world. Discover some of the different features of the stock exchange below.

1. One of the main functions of a stock exchange is to provide a fast, sustainable and constant demand for buying and selling securities. There are outlets ready to buy and sell these securities. It also functions as a sales window for securities listed on the stock exchange.

2. Among the various functions of the stock exchange, one is to speed up the entire process of capital accumulation and formation as much as possible. It induces or teaches savings and investment and risk-taking habits among investors. The stock exchange aims to turn valuable savings into profits. It also functions as a tool for capital formation. It serves as a safe and profitable medium for investment.

3. Providing the necessary and essential information to potential and current investors is one of the basic functions of the stock exchange. Such information can be easily found on their website. They regularly advertise in various newspapers, business magazines and television channels on various investment opportunities and provide appropriate guidance. It aims to encourage investors and make them aware of their investment in the stock market.

4. Providing a safe and secure way to do business and investment is one of the stock exchange's top priorities. Transactions on the stock exchange are conducted under clearly outlined rules and regulations. Stock exchange authorities are responsible for monitoring employees. It is not recommended to practice counterfeiting and it will be dealt with promptly.

5. On the stock exchange, listed companies must consistently comply with the rules and regulations that are already clearly defined. Before joining the army, they are required to submit various documents and provide all information regarding their return. Providing documentation serves as a means of monitoring important activities that an organization plans to undertake in the future. These rules and regulations have been created to ensure the security of investments and funds.

6. Another important function of the stock exchange is to support and enable the creation of new business ventures. Financing and capital are required for a venture to function. This is done by the stock exchange. They serve as the primary platform for new businesses to raise funds to meet their financial needs. The stock exchange will help you set up new ventures.

7. The stock exchange not only helps individuals and business ventures raise funds for their financial needs, but also acts as a platform for governments to raise funds for major development and expansion projects. In many cases, central and state governments have raised millions of dollars to meet growing needs.

Q7) Explain the functions and role of BSE .      8

A7. Functions of Bombay Stock Exchange (BSE)

1. The Bombay Stock Exchange has contributed significantly to India's rapid growth in GDP from 2002 to 2007, and has also contributed to the introduction of technology into the financial sector.
2. BSE acts as a continuous market for securities that investors and traders trade and buy and sell on the stock market.
3. The Bombay Stock Exchange acts as a first-level regulator of the securities market. From focusing on transparency, monitoring the market and establishing a monitoring mechanism that can detect stock price fraud and manipulation.
4. The exchange guarantees liquidity. Speaking of other institutions like banks and LIC, they can always invest money in the stock market, make a profit in a short period of time, and sell it immediately if they need it.
5. BSE also provides counterparty risk management for all transactions made on the trading platform through clearing and settlement services.
6. The stock exchange encourages both companies and investors to buy and sell stocks, providing opportunities for capital formation that will lead to the growth of the Indian economy in terms of attracting foreign investors and industrial development.

Role of BSE

India's BSE Stock Exchange is huge in terms of number of listed companies and market capitalization. Prior to the existence and regulation of international capital markets, BSE had created its own comprehensive rules and regulations for Indian capital markets. It was after independence that the exchange established the best trading tradition for Indian capital markets. It was highly valued by the global capital markets.

Permanent approval was granted under the Bombay Stock Exchange Securities Contract Regulation Act of 1956. The exchange is governed by a board of directors headed by the managing director. The Board of Directors consists of a group of prominent experts, trading member representatives, and public representatives who play important roles in its operation.

Few companies in India do not use BSE for their capital. BSE is considered a symbol of India's capital markets. BSE Sensex is a benchmark equity index that reflects the movements of the country's economy and financial markets. BSE is a leader in many areas and is internationally equivalent.

Q8) What is the role of National Stock Exchange of India?   8

A8. Effective Mobilization of Savings Stock exchanges provide an organized market for institutional investors as well as individual investors.

They regulate transactions with appropriate rules and regulations to ensure the protection of investors. This helps strengthen the trust of investors and small savers. Therefore, stock exchanges attract small savings, especially for large numbers of investors in the capital markets.

Promotion of capital formation

The funds mobilized through the capital markets are provided to industries engaged in the production of various goods and services that are useful to society. This leads to the formation of capital and the development of national assets. Mobilized savings are directed to the right investment vehicle. Wider Ways of Investing Stock exchanges offer a wider way of investing to people and organizations with a surplus of investment. Companies in different industries such as information technology, steel, chemicals, fuels and petroleum, cement and fertilizers offer investors different types of equity and debt securities. Online trading facilities have brought the stock exchange to the gateway to investors through computer networks. Different types of securities are available on the stock exchange for different purposes and concepts of different classes of investors.

The information you need from the stock exchange, available from a variety of sources, will guide investors in effectively managing their investment portfolio. * Investment liquidity, the stock exchange provides investors with investment liquidity. Investors can sell out their investment in securities at any time during the trading day and trading hours on the stock exchange. Therefore, the stock exchange provides liquidity for investment. Demat Securities' online trading and online payments allow investors to sell out their investments and generate returns within a day or two.

Even investors can switch from one security to another as capital market scenarios change. * Investment Priorities Stock exchanges help investors prioritize their investments by offering baskets of different types of securities from different industries and companies. He can sell shares of one company or buy shares of another company through the stock exchange at any time. He can manage his investment portfolio to maximize his wealth. * Investment safety

Through the Articles of Incorporation, the Indian Stock Exchange (SEBI) Guidelines, the stock exchange seeks to provide security for investing in industrial securities through transparent procedures. The government has established the National Stock Exchange (NSE) and the Over-the-Counter Exchange (OTCEI) in India for investor safety. Exchange authorities are trying to curb speculative practices and minimize the risk of general investors maintaining self-confidence. * Public and private sector financial resources. The stock exchange makes available financial resources available to the public and private sector industries through various types of securities.

Public issuance of securities by these industries has received a strong response (leading to issuance oversubscription) due to liquidity, marketing support and the security of investment through stock exchanges. Funds for Development the Stock Exchange enables the government to mobilize funds for utilities and utilities involved in the development of electricity projects, shipping, railroads, telecommunications, dams, dams and more.

The stock exchange provides liquidity, marketability, price continuity, and continuous valuation of government bonds. The stock exchange is a symbolic indicator of national industrialization. Productivity, efficiency, economic conditions, and outlooks for each industry and all units within the industry are reflected in the price fluctuations of industrial securities on the stock exchange. The stock exchange sensibilities of various companies and the price fluctuations of securities give an overall picture of changes in the industrial sector. Barometer of the national economy the stock exchange is considered a barometer of the national economy. Each economy is economically symbolized by its most important stock exchange (indicator). The New York Stock Exchange, London Stock Exchange, Tokyo Stock Exchange, and Bombay Stock Exchange are considered barometers in the United States, United Kingdom, Japan, and India, respectively. At both national and international levels, these stock exchanges represent economic progress and status.

Q9) What is money market? Write its composition.    8

A9. The Money Market is a prepared forex marketplace wherein members can lend and borrow excessive exceptional bonds withinside the quick time period with a median adulthood of twelve months or less. This permits governments, banks, and different big establishments to promote quick-time period securities to fund their quick-time period coins waft needs. Money markets additionally permit person traders to make investments small quantities of cash in a low-danger environment.

Products traded at the cash markets consist of Treasury payments, certificate of deposit, business paper, federal budget, payments of exchange, quick-time period mortgage-subsidized securities and asset-subsidized securities.

Large groups with quick-time period coins waft can borrow immediately from the marketplace via dealers, at the same time as SMEs with extra coins can borrow via cash marketplace mutual budget.

Individual traders who need to benefit from the cash marketplace can make investments via a cash marketplace financial institution account or a cash marketplace mutual fund. Money Market Mutual Funds are professionally controlled budget that buy cash marketplace securities on behalf of person traders.

Composition

Money markets are not a single homogeneous market. It consists of several submarkets that collectively make up the money market. Competition must occur within each submarket and between different submarkets. The main submarkets of the money market are:

1. Call the cash marketplace:

The name cash marketplace is a totally quick-time period marketplace. Stock alternate constructing agents and sellers commonly borrow cash over the tele cell smart phone from a business financial institution. These loans are provided in a totally quick time period now no longer exceeding 7 days beneath any circumstances, however extra regularly handiest day by day or at night, that is, 24 hours a day.

There isn't any call for collateral securities for name cash. They manage excessive liquidity. The borrower has to pay the mortgage whilst requested, that is, with a totally quick notice. This is why those loans are called "name cash" or name loans. Therefore, the decision cash marketplace is an vital detail of the cash marketplace.

Investing price range withinside the name marketplace meets your liquidity wishes, however it does now no longer meet your profitability wishes due to the fact hobby charges on name loans are very low and exalter ate numerous instances at some point of the day.

Call loans are handy for business banks as they may be transformed into coins at any time. They are nearly like coins. This is a form of secondary coins reserve for business banks to earn a few incomes.

2. Collateral mortgage marketplace:

It's some other vicinity of ​​know-how withinside the cash marketplace. The marketplace for equities and marketplace-sponsored loans is geographically the maximum diverse and the maximum loosely organized. Loans are commonly lent to non-public sectors withinside the marketplace through business banks.

Collateral loans are sponsored through securities, shares and bonds. Asset-sponsored securities may be in a few precious form, consisting of authorities bonds, which might be incredibly marketable and feature low charge volatility.

The loan can be repaid to the borrower whilst the mortgage is repaid. If the borrower is not able to pay off the mortgage, the collateral turns into the belongings of the lender. These loans are given for numerous months. Borrowers are commonly shares or inventory sellers. But even small business banks can borrow loan loans from massive banks.

3. Acceptance marketplace:

Banker popularity may be vintage from business credit score. The popularity marketplace is the popularity marketplace for bankers concerned in exchange transactions. This marketplace offers with financial institution approvals. This can be described as a draft that the business enterprise has created and accepted through the financial institution.

You ought to pay a sure quantity for a specific birthday celebration or owner's order on a specific date withinside the destiny. These acceptances end result from trade each locally and internationally. A marketplace in which bankers' popularity is effortlessly offered and discounted is referred to as the popularity marketplace.

Raymond P. Kent, in his e-e book Money and Banking, states that banker approval is "a draft created through a character or business enterprise at a financial institution and accepted through the financial institution to pay for the orders of the unique parties.  “To undergo a sure amount of cash at a particular time withinside the destiny.”

I would really like to differentiate among banker popularity and assessments. Bank clerk consent can be paid on the required destiny date; however assessments can be paid on request. Banker approval is effortlessly discounted withinside the cash marketplace as its miles signed through the banker.

In the case of host housing, the financial institution isn't always concerned. The financial institution really introduced that assure to the draft. However, it's miles really well worth noting that banker approvals are specially utilized in global exchange. In London's cash marketplace, there are specialised groups referred to as host housing that be given invoices created through investors in preference to taking gain of authentic debtors.

In the past, host housing turned into very vital in London's cash marketplace, however now it is tons much less vital. These aren't vital withinside the Indian cash marketplace as there may be no receiving marketplace development.

4. Building marketplace:

A marketplace in which quick-time period files and invoices are sold and offered.

The vital forms of quick-time period treatises are:

(A) Exchange bill and

(B) Financial payments.

(A) Exchange bill:

The alternate invoice is business paper. An alternate bill is an unconditional buy order signed through a withdrawal, and the addressee is needed to pay a hard and fast quantity upon request or at a hard and fast time withinside the destiny.

If the purchaser suggests that he / she has agreed to the bill itself, it turns into a felony document. Such payments are discounted or redistributed through business banks to lend credit score to the invoice holder or the borrower from the relevant financial institution.

(B) Financial payments:

Treasury securities are commonly quick-time period authorities’ files / securities for ninety one days. An economic invoice is a central authority promissory word that will pay a particular quantity after a particular period. These are offered through the relevant financial institution on behalf of the authorities.

India's money market was tightly regulated and characterized by a limited number of participants. Limited types and instruments were available. Interest rates on financial instruments were under the control of the Reserve Bank of India. When the government began reforming the financial sector, serious efforts were made to develop the money market.

The money market is a short-term, liquid bond market. These examples include banker consent, repos, certificates of deposit, and Treasury securities with a maturity of one year or less, often 30 days or less. Money market securities are generally very safe investments and are relatively profitable. Low interest rates most suitable for temporary cash storage or short-term needs.

Q10) Explain money market and its structure.     8

A10. The Money Market is a prepared forex marketplace wherein members can lend and borrow excessive exceptional bonds withinside the quick time period with a median adulthood of twelve months or less. This permits governments, banks, and different big establishments to promote quick-time period securities to fund their quick-time period coins waft needs. Money markets additionally permit person traders to make investments small quantities of cash in a low-danger environment.

Products traded at the cash markets consist of Treasury payments, certificate of deposit, business paper, federal budget, payments of exchange, quick-time period mortgage-subsidized securities and asset-subsidized securities.

Large groups with quick-time period coins waft can borrow immediately from the marketplace via dealers, at the same time as SMEs with extra coins can borrow via cash marketplace mutual budget.

Individual traders who need to benefit from the cash marketplace can make investments via a cash marketplace financial institution account or a cash marketplace mutual fund. Money Market Mutual Funds are professionally controlled budget that buy cash marketplace securities on behalf of person traders.

Structure of Indian Money Market:

(i)                Broadly speaking, India's money markets consist of two sectors: (a) an organized sector and (b) an unorganized sector.

(ii)              The organized sectors include the Reserve Bank of India, the State Bank of India with seven affiliates, 20 nationalized commercial banks, other scheduled and unscheduled commercial banks, foreign banks, and local regions. It consists of banks. It is called organization because that part is systematically coordinated by the RBI.

(iii)           Non-bank financial institutions such as LIC, GIC and subsidiaries, and UTI also operate in this market, but they operate only indirectly through banks and not directly.

(iv)            Quasi-government agencies and large corporations also make short-term surplus funds available in markets organized through banks.

(v)              Cooperative credit institutions occupy an intermediate position between the organized and unorganized parts of India's money markets. These institutions have a three-layer structure. At the top is the state co-operative bank. At the local level, there are primary credit unions and urban co-operative banks. Organized sectors should include only state and central co-operative banks, given their size, operating practices, and transactions with RBIs and commercial banks. Co-operatives at the local level are loosely tied to it.

(vi)            The unorganized sector consists of indigenous banks and money lenders. That part of the activity is not systematically coordinated by the RBI and is not organized.

(vii)         Money lenders operate nationwide, but there is no connection between them.

(viii)       Indigenous banks are somewhat more organized as they enjoy re-discount facilities from commercial banks linked to RBI. However, this type of organization represents a loose connection with the RBI.

Q11) What is money market? What are the main components of the money market?                                                                                                                                                          5

A11. The money market is a market for short-term instruments that are close substitutes for money. The short term instruments are highly liquid, easily marketable, with little change of loss. It provides for the quick and dependable transfer of short term debt instruments maturing in one year or less, which are used to finance the needs of consumers, business agriculture and the government. The money market is not one market but is “a collective name given to the various form and institutions that deal with the various grades of near ­money.”

Various institutions in the money market typically include:

1. Central bank:

Not surprisingly, to be the leader of all banks. It is the banks that control the funds and issuance of funds to the market and regulate the credit lines offered by various other institutions.

2. Commercial bank:

They play an important role in the money market. They lend out prepayments, discounted bills, promissory notes and more. They also rely on the market to help solve liquidity problems.

3. Discount House:

Discount houses are a special institution for redistributing bills exchanged. They usually deal with three types of bills.

(A) Domestic bill

(B) Foreign bills and

(C) Government financial bill.

Discount House borrows huge amounts of money from commercial banks and RBI in a short period of time and invests them in discounted bills. However, before discounting the bill of exchange, the discount house argues that it should be accepted by the acceptance house.

4. Acceptance House:

Acceptance House is an institution that specializes in receiving exchange invoices. Generally they are merchant bunker. They act as the second signer of the exchange bill. That is, they guarantee a trader's bill with unknown financial status to make the bill negotiable.

They place correspondents in key towns in various locations both domestically and internationally to collect information about the creditworthiness and financial position of customers seeking assistance from the Acceptance House. Due to their service, they charge a small fee, but guarantee excellent security for invoices discounted by the discount house.

5. Building broker:

A "build broker" knows the customer well and acts as an intermediary between the seller and the buyer of the invoice for a small fee. From time to time, these invoice brokers discount invoices in their own accounts.

Q12) What are the functions of money market instruments?   5

A12. Functions of money market products

1. Fund

Money Market Instruments helps provide short-term funding to private and public institutions that need funding to meet their working capital requirements. These funds are provided by discounting bills of exchange through commercial banks, brokers, discount houses, and acceptance houses. Therefore, money market means can, in turn, help the development of domestic and foreign trade, industry, and commerce.

b.    Use of surplus funds

Money market products provide banks and financial institutions with the opportunity to make good use of their surplus funds in a short period of time. They include not only commercial banks, but also large non-financial companies, states and other local governments.

c.     No need to borrow from a bank

For advanced money markets, you don't have to borrow money from commercial or central banks. However, if you are short of cash, you can call a portion of your loan from the money market. Also, most commercial banks prefer to collect a loan from a central bank at a higher interest rate.

d.    Support the government

Money market tools have proven to help governments in borrowing short-term funds under Treasury securities at low interest rates. Moreover, if the government has to issue banknotes or borrow from central banks, it will put inflationary pressure on the economy.

e.     Useful for monetary policy

The presence of a well-developed money market helps central banks to successfully implement monetary policy. Central banks can only manage the banking system through the money market, which impacts commerce and the industry.

f.       Helps with economic mobility

The Monet market helps financial stability by facilitating the transfer of funds from one sector to another. And economic liquidity is important for the development of commerce and industry.

g.    Promotes liquidity and safety

Apart from encouraging savings and investment, money market products promote the liquidity and security of financial assets.

h.    Equilibrium between supply and demand of funds

Money markets balance the supply and demand of loan funds by allocating savings to investment channels.

i.       Economy of cash use

Money market products deal with cash-equivalent assets rather than cash, which helps save cash usage. Therefore, it can be considered a convenient way to move funds from one place to another.

Q13) Explain Discount house.        8

A13. In the UK, money markets are made up of several linked markets, all concentrated in London. Known as discount houses, the 12 specialized banks have the longest history of money market institutions. They have their origins in London's building brokers, who created a market in inland commercial buildings in the early 19th century. By selling bills through this market, growing industrial and urban areas were able to take advantage of surplus savings in agricultural areas. Quite early on, many building brokers began borrowing money from banks to buy and hold these buildings, rather than just acting as brokers, thus becoming the first discount house. Since then, the main assets held by Discount House have been commercial bills (the first inland bill above and subsequent bills to finance international trade), financial bills, and short-term government bonds. The commercial bill revived in the 1960s and finally became the largest single-class asset of discount houses, but was later overtaken by certificates of deposit.

Significant changes were introduced into the UK monetary system in 1971, but the money in the call to the discount house remained a reserve asset. This is the security and liquidity of call money, and banks hold about half of the reserves required in this form, despite a slightly lower rate compared to other reserve assets. This provides a large amount of money to the discount house and invests in assets for a relatively short period of time. The most important of these are certificates of deposit, followed by commercial bills, municipal bonds and financial bills. This asset pattern is heavily influenced by the fact that all call loans to discount houses are secured loans and the asset parcels are deposited as collateral in proportion to the lending bank. Therefore, the assets held by the discount house must be suitable for use.

In addition, the Bank of England must hold a significant proportion of its redistributable assets as needed, and the Bank of England limits holdings of non-public sector debt assets up to 20 times its capital resources.

On the debt side of the discount house balance sheet, investing in call money is part of its day-to-day operations. Banks that expect to make net payments to other banks during the day (for example, check settlements paid by customers to customers) will probably call part of the call loan. By convention, this is done by noon. The bank that called the money pays it to the other bank, so these other banks have the same amount to re-lend to the discount house in the afternoon. Therefore, the discount house can "balance the books". That is, you can borrow enough money in the afternoon to replace the loan called in the morning.

It's not uncommon for £ 100m to be summoned and re-rented from a discount house on active days.

There is one main reason why money positions can be unbalanced in this way. The UK Government account is kept at the Bank of England and is not rented over the phone like other banks. Therefore, net payments to or from these government accounts tend to cause a net shortage or surplus money in the discount house in the afternoon and raise or lower the rate of money. The Bank of England can offset such shortfalls and surpluses by allowing them to affect interest rates, buying and selling bills, or lending them to discount houses overnight at market prices. Even if the Bank of England does not act this way to address the shortage of funds, the discount house will always have the right to borrow from the Bank of England (lender of last resort) to ultimately secure the necessary funds. Approved security with "minimum loan rate" (penalty rate).

On the balance sheet asset side, the discount house is an active dealer of many of the assets it holds. They make markets in Sterling's certificates of deposit and commercial buildings, citing various maturity trading rates. They also quote the rate of sale of financial bills they obtain in weekly bids, competing with each other and with other banks that may bid, including the Bank of England. Most of these other banks bid on financial bills to reach maturity, but discount houses sell them on average after just a few weeks of the 91-day lifespan of the bills. Most of these invoices are sold to clearing banks that do not bid on their accounts.

Q14) What is call money market? State its features.    5

A14. All commercial banks in India borrow money from other banks to make up for sudden cash shortages on certain days in the following situations:

Relax temporary funding requirements due to liquid asset and liability mismatches

To meet the required requirements of CRR & SLR, or

To meet the demand for funds resulting from the unexpected outflow of large amounts of funds.

The call money market is only available to upcoming commercial banks and

Primary dealers. In this market, banks have overnight (one day) loans available to meet short-term liquidity requirements. At the same time, the call money market also provides banks with daily surplus funds with the opportunity to lend and profit from it. In this way, banks that want to take advantage of liquidity approach the call market as borrowers, and banks with excess liquidity join there as lenders.

The call money market is only available to upcoming commercial banks and primary dealers. Call money transactions are conducted through NDS's electronic trading platform. The market works from Monday to Friday. Banks that need funds can borrow money by participating in auctions and negotiations at CMM. The auction is only for interest rates, so anyone ready to set a higher interest rate can take out a loan. Participants are also free to decide interest rates through counterparty negotiations. The average annual interest rate of an overnight fund in the call money market on a particular day is known as the call rate. The money borrowed in this way is repaid with interest at the start of business the next day and is called "call money".

Normally, if the call rate is higher than the fixed repo rate, the RBI repo rate usually acts as the floor rate of the call money because the bank first approaches the RBI on the funding requirements before entering the call money market. .. Similarly, if the call money rate is lower than the reverse repo rate, the bank will first rush to the RBI and park the surplus funds at the fixed reverse repo rate.

Call money market features

Loans are available through auctions / negotiations. The auction is held at interest rates. The highest bidder (ready to give higher interest rates) can take out a loan. The average interest rate on the call market is called the call rate. Call money transactions are conducted through an electronic trading platform called the Negotiated Trading System (NDS). This call money rate is an important variable for the RBI to assess the liquidity of the economy. CMM is known as the most delicate segment of the financial system.

Since the participants are banks, the call money rate indicates the overall liquidity position of the economy. Higher call rates indicate liquidity stress in the economy. In this case, the RBI may follow up on liquidity support measures through monetary policy measures, such as reducing CRR or allowing more repo transactions. Therefore, call money rates are considered an operational goal of monetary policy.

Q15) Explain the main purpose of money market.    5

A15. Money markets contribute to the stability and development of the country's economy by providing short-term liquidity to governments, commercial banks and other large organizations. Investors who have extra money they don't need can invest it in the money market and earn interest.

The main functions of the money market are as follows.

1. Funds

Money markets fund domestic and international traders in urgent need for short-term funding. It provides the ability to discount bills of exchange, which instantly fund the payment of goods and services.

International traders benefit from acceptance houses and discount markets. Money markets also make funds available to other units of the economy, such as agriculture and small industries.

2. Central bank policy

The central bank is responsible for guiding the country's monetary policy and taking steps to ensure a sound financial system. Through the money markets, central banks can efficiently perform their policy-making functions.

For example, money market short-term interest rates represent the general situation in the banking industry and can guide central banks in developing appropriate interest rate policies. The integrated money markets also help central banks influence submarkets and implement their monetary policy goals.

3. Industrial growth

Money markets provide an easy way for businesses to obtain short-term loans to meet their working capital needs. Due to the high volume of transactions, companies may experience cash shortages associated with purchasing raw materials, paying employees, or paying other short-term costs.

You can easily borrow money in the short term through commercial papers and financial bills. Money markets do not offer long-term loans, but they affect capital markets and help businesses get long-term loans. Capital markets benchmark interest rates based on the prevailing interest rates of the money markets.

4. Self-sufficiency of commercial banks

Money markets provide commercial banks with a ready market in which they can invest surplus reserves and earn interest while maintaining liquidity. Short-term investments such as bills of exchange can easily be converted to cash to support customer withdrawals.

Also, in the face of liquidity issues, instead of borrowing from a central bank, you can borrow from the money markets in the short term. The advantage of this is that money markets may charge short-term loans lower interest rates than central banks normally do.