Financial System Very Short Answer Type Questions

Question 1.
What is a financial system?
Answer:
Financial system is a set of inter-related activities or services working together . to achieve some predetermined purpose or goal.

Question 2.
State the components of Indian financial systems.
Answer:
The components of Indian financial system includes the following:

  • Financial market
  • Financial instruments
  • Financial intermediation
  • Financial service

Question 3.
What is a financial market?
Answer:
A Financial Market can be defined as the market in which financial assets are created or transferred. It is a place or mechanism where funds or savings are transferred from one section to another section of financial system.

Question 4.
What is financial asset?
Answer:
Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

Question 5.
What is a money market?
Answer:
The money market is a wholesale debt market for low-risk, highly-liquid, short term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions.

Question 6.
What is a capital market?
Answer:
A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). The capital market is designed to finance the long-term investments. The ransactions taking place in this market will be for periods over a year

Question 7.
Define financial system.
Answer:
According to Robinson the primary function of the system is “to provide a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of existing wealth.

Question 8.
What is forex market?
Answer:
The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe.

Question 9.
What is credit market?
Answer:
Credit market is a place where banks, FIs and NBFCs provide short, medium and long-term loans to corporate and individuals

Question 10.
What is a commercial paper?
Answer:
CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery.

Question 11.
What is a call money?
Answer:
Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is “Call Money”.

Question 12.
Define money market.
Answer:
According to Geottery Crowther money market is defined as “The market is a i collective name given to the various firms and institutions that deal in the various grader of near money”.

Question 13.
What is treasury bill?
Answer:
Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder.

Question 14.
What are hybrid instruments?
Answer:
Hybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid instruments. Examples are convertible debentures, warrants etc.

Question 15.
State the various money market instruments.
Answer:
The various money market instruments are:

  • Call/Notice Money
  • Treasury Bills
  • Term Money
  • Certificate of Deposit
  • Commercial Papers

Question 16.
What do you mean by inter bank term money?
Answer:
Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.

Question 17.
What is primary market?
Answer:
The primary market is that part of the capital markets that deals with the issuance of new securities Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue.

Question 18.
Distinguish between primary and secondary market.
Answer:
In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors: Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.

Question 19.
Name any two objectives of money market.
Answer:
Objectives of money market are:

  • To provide an equilibrium mechanism for solving problems relating to short term surplus and deficits.
  • To provide access to users of short term money to meet their requirements at a reasonable price.

Question 20.
Name any four features of Indian money market.
Answer:
Features of Indian money market are:

  • Highly organized banking system
  • Presence of a central bank
  • Availability of proper credit instruments
  • Existence of sub markets
  • Demand and supply of funds
  • Ample resources

Question 21.
What is secondary market?
Answer:
Secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds,options, and futures are bought and sold.

Question 22.
What is a repo market?
Answer:
The repo market is one in which two participants agree that one will sell securities to another and make a commitment to repurchase equivalent securities on a future specified date, or on call, at a specified price. In effect, it is a way of borrowing or lending stock for cash, with the stock serving as collateral.

Question 23.
State any two functions of financial market?
Answer:

  • It provides a channel through which new savings flow into capital market which facilitates smooth capital formation in the economy.
  • It facilitates the transfer of real economic resources from lenders to ultimate borrowers in financial system.
  • It provides the borrowers with funds which they will invest in some productive purpose.
  • It provides liquidity in the market through which the claims against money can be resold by investors at any time and there by assets can be converted in to cash.

Question 24.
State the components of Indian financial system.
Answer:
The components of Indian financial system are:

  • Financial institutions
  • Financial instruments
  • Financial markets
  • Financial services

Question 25.
State the characteristics of treasury bills.
Answer:

  • These are issued as a promissory note at discount over their face value.
  • It is used to raise short term funds to bridge seasonal/temporary gaps between receipt and expenditure of the Govt.
  • It is a negotiable instrument.
  • Assured yield and low transaction cost.
  • Eligibility for inclusion in SLR.

Question 26.
What is acceptance market?
Answer:
Investment market based on short-term credit instruments is termed as acceptance market. An acceptance is a time draft or bill of exchange that is accepted as payment for goods. A banker’s acceptance, for example, is a time draft drawn on and accepted by a bank, which is a common method of financing short-term debts in international trade including import-export transaction.

Question 27.
What is a financial asset?
Answer:
Financial Assets of Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

Question 28.
What is a discount market?
Answer:
A discount market is the part of the money market consisting of banks, discount houses and brokers on which bills are discounted.

Question 29.
Explain the components of unorganized money market.
Answer:
The components of unorganized money market comprises of indigenous bankers, money lenders, chit funds, nidhis, loan companies and finance brokers.

Question 30.
Write two differences between money market and capital market.
Answer:
Money Market:

  • It is market for short – term loanable funds for a period of not exceeding one year.
  • This market supplies funds for financing current business operation, working capital requirements of industries and short – period requirements of the government.

Capital Market:

  • It is a market for long-term funds exceeding a period one year.
  • This market supplies funds for financing the fixed capital requirements of trade and commerce as well as the long-term requirements of the Government.

Question 31.
What is call money market?
Answer:
Call money market refers to market for very short term funds not exceeding 7 days.

Question 32.
What do you mean by “ Financial Dualism”?
Answer:
The process which helps in economic development and encourages investment and savings by establishing continuous effective relationship between savings and investment Of the people is called financial dualism.

Question 33.
What do you mean by the malpractice, “Insider Trading”?
Answer:
The process of creating fraud in capital market by some executives in organizations by making use of unpublished information. They make assumption about these information and misuse their positions in the organization.

Question 34.
Expand Repo.
Answer:
Repurchase Agreement.

Question 35.
Who are the important players or participant of money market.
Answer:
Govt, RBI, Banks, Discount and Finance House of India, Financial Institutions, Mutual Funds etc.

Question 36.
What are capital market instruments?
Answer:
Capital market instruments are broadly divided into two types:

  • Equity instruments
  • Debt instruments

Question 37.
Give the meaning of equity instruments.
Answer:
Equity instruments are also called as ownership funds comprises equity shares, preference shares and deferred shares.

Question 38.
What is debt instruments?
Answer:
Debt instruments are also called as creditor ship securities comprises of all interest bearing securities like debentures, bonds, public deposits, bank loans, etc.