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Chapter 6 · Class 12 Business Studies

Financial Markets — Important Questions

58 questions With answers CBSE format

SUMMARY: The chapter on Financial Markets in Class 12 Business Studies explains the role and functioning of financial markets in the economy, highlighting their importance in mobilizing savings and facilitating investment.
KEY TOPICS: functions of financial markets, money market, capital market, primary market, secondary market, stock exchange, SEBI (Securities and Exchange Board of India), trading procedure, depository services, dematerialization.

Previous chapter Financial Management Next chapter Marketing Management
Multiple Choice Questions (MCQs) 15 questions
Q1 1 Mark

Money market is a market for:

ALong-term funds
BShort-term funds
CForeign exchange
DEquity only
Check answerHide answer
Correct answer: Option 2 — Short-term funds
Q2 1 Mark

Treasury Bills are issued by:

ACommercial banks
BRBI on behalf of Government
CSEBI
DStock exchanges
Check answerHide answer
Correct answer: Option 2 — RBI on behalf of Government
Q3 1 Mark

Which is NOT a function of stock exchange?

AProviding liquidity
BPricing of securities
CIssuing new shares
DSpreading equity cult
Check answerHide answer
Correct answer: Option 3 — Issuing new shares
Q4 1 Mark

SEBI was made statutory in:

A1988
B1992
C1995
D2000
Check answerHide answer
Correct answer: Option 2 — 1992
Q5 1 Mark

Trading and settlement on Indian stock exchanges follows:

AT+1 cycle
BT+2 cycle
CT+3 cycle
DT+5 cycle
Check answerHide answer
Correct answer: Option 1 — T+1 cycle
Q6 1 Mark

What is the primary function of financial markets?

ATo facilitate trade between countries
BTo mobilize savings and facilitate investment
CTo regulate foreign exchange rates
DTo provide loans to businesses
Check answerHide answer
Correct answer: Option 2 — To mobilize savings and facilitate investment
Q7 1 Mark

Which of the following is NOT a component of the capital market?

AEquity shares
BDebentures
CTreasury bills
DMutual funds
Check answerHide answer
Correct answer: Option 3 — Treasury bills
Q8 1 Mark

Which market is primarily concerned with short-term borrowing and lending?

ACapital market
BMoney market
CSecondary market
DPrimary market
Check answerHide answer
Correct answer: Option 2 — Money market
Q9 1 Mark

What is the role of SEBI in the financial markets?

ATo issue currency notes
BTo regulate and promote the securities market
CTo manage public sector banks
DTo provide insurance services
Check answerHide answer
Correct answer: Option 2 — To regulate and promote the securities market
Q10 1 Mark

In which market are new securities issued to the public for the first time?

ASecondary market
BMoney market
CPrimary market
DStock exchange
Check answerHide answer
Correct answer: Option 3 — Primary market
Q11 1 Mark

Which of the following best describes dematerialization?

AThe process of converting physical shares into electronic form
BThe issuance of new shares in the market
CThe buying and selling of shares in the stock exchange
DThe process of borrowing money from banks
Check answerHide answer
Correct answer: Option 1 — The process of converting physical shares into electronic form
Q12 1 Mark

What is the main difference between the primary and secondary market?

APrimary market deals with existing securities, secondary market with new ones
BPrimary market is for short-term securities, secondary market for long-term
CPrimary market involves direct transactions with companies, secondary market involves trading among investors
DThere is no difference, both terms are interchangeable
Check answerHide answer
Correct answer: Option 3 — Primary market involves direct transactions with companies, secondary market involves trading among investors
Q13 1 Mark

Which of the following is a feature of the stock exchange?

AIt is a place for issuing new securities
BIt facilitates the buying and selling of existing securities
CIt provides loans to companies
DIt is regulated by the Reserve Bank of India
Check answerHide answer
Correct answer: Option 2 — It facilitates the buying and selling of existing securities
Q14 1 Mark

What does the term 'trading procedure' refer to in the context of financial markets?

AThe process of issuing new shares
BThe method of buying and selling securities
CThe regulation of financial institutions
DThe analysis of market trends
Check answerHide answer
Correct answer: Option 2 — The method of buying and selling securities
Q15 1 Mark

Which of the following is NOT a function of financial markets?

AProviding liquidity
BFacilitating price discovery
CRegulating government policies
DMobilizing savings
Check answerHide answer
Correct answer: Option 3 — Regulating government policies
Short Answer Questions 10 questions
Q16 3 Marks

Distinguish between primary and secondary markets on three bases.

View sample solutionHide solution
Function (issue of new securities vs trading of existing securities); Participants (issuing companies and investors vs investors trading among themselves); Capital formation (direct vs indirect); Pricing (fixed by issuer vs determined by demand and supply); Location (no fixed place vs stock exchange).
Q17 3 Marks

List any three money market instruments.

View sample solutionHide solution
Treasury Bill (T-Bill); Commercial Paper (CP); Call Money; Certificate of Deposit (CD); Commercial Bill (Trade Bill) — any three.
Q18 3 Marks

State any three functions of a stock exchange.

View sample solutionHide solution
Providing liquidity and marketability to existing securities; Pricing of securities through demand-supply forces; Safety of transactions through SEBI regulations; Contributing to economic growth via reallocation of funds; Spreading equity cult; Providing scope for speculation in restricted manner; Facilitating capital formation — any three.
Q19 3 Marks

What is the role of SEBI?

View sample solutionHide solution
SEBI is the regulator of securities market established 1988 (statutory 1992). Roles: Protects interests of investors; Regulates working of stock exchanges and intermediaries; Promotes self-regulatory organisations; Prohibits fraudulent and unfair practices; Promotes fair practices and code of conduct; Conducts research and publishes information.
Q20 3 Marks

Explain any two methods of floatation in primary market.

View sample solutionHide solution
1) Public issue/IPO — invitation to general public via prospectus. 2) Offer through prospectus — most common, securities listed and traded on stock exchanges. 3) Private placement — selling securities to a select group of investors (max 200). 4) Rights issue — offering additional shares to existing shareholders in proportion to holdings. 5) e-IPO — using electronic system through stock exchange. 6) Offer for sale — issued through brokers/issuing houses (any two).
Q21 3 Marks

Distinguish between primary and secondary markets on three bases.

View sample solutionHide solution
Function (issue of new securities vs trading of existing securities); Participants (issuing companies and investors vs investors trading among themselves); Capital formation (direct vs indirect); Pricing (fixed by issuer vs determined by demand and supply); Location (no fixed place vs stock exchange).
Q22 3 Marks

List any three money market instruments.

View sample solutionHide solution
Treasury Bill (T-Bill); Commercial Paper (CP); Call Money; Certificate of Deposit (CD); Commercial Bill (Trade Bill) — any three.
Q23 3 Marks

State any three functions of a stock exchange.

View sample solutionHide solution
Providing liquidity and marketability to existing securities; Pricing of securities through demand-supply forces; Safety of transactions through SEBI regulations; Contributing to economic growth via reallocation of funds; Spreading equity cult; Providing scope for speculation in restricted manner; Facilitating capital formation — any three.
Q24 3 Marks

What is the role of SEBI?

View sample solutionHide solution
SEBI is the regulator of securities market established 1988 (statutory 1992). Roles: Protects interests of investors; Regulates working of stock exchanges and intermediaries; Promotes self-regulatory organisations; Prohibits fraudulent and unfair practices; Promotes fair practices and code of conduct; Conducts research and publishes information.
Q25 3 Marks

Explain any two methods of floatation in primary market.

View sample solutionHide solution
1) Public issue/IPO — invitation to general public via prospectus. 2) Offer through prospectus — most common securities listed and traded on stock exchanges. 3) Private placement — selling securities to a select group of investors (max 200). 4) Rights issue — offering additional shares to existing shareholders in proportion to holdings. 5) e-IPO — using electronic system through stock exchange. 6) Offer for sale — issued through brokers/issuing houses (any two).
Long Answer Questions 6 questions
Q26 6 Marks

Discuss the functions of financial market and distinguish between money market and capital market.

View sample solutionHide solution
Functions of financial market: 1) Mobilisation of savings and channelising into productive uses. 2) Facilitate price discovery through demand and supply. 3) Provide liquidity to financial assets. 4) Reduce cost of transactions by providing valuable information. Money market vs Capital market: Period (≤1 year vs >1 year); Instruments (T-Bills, CP, CD, Call money vs Equity, Debentures, Bonds); Liquidity (high vs comparatively less); Participants (RBI, banks, financial institutions vs banks, financial institutions, FIIs, retail investors); Risk (low credit and market risk vs higher); Returns (low vs high); Regulator (RBI vs SEBI).
Q27 6 Marks

Explain the trading and settlement procedure on a stock exchange.

View sample solutionHide solution
1) Selection of broker — investor must trade through a SEBI-registered broker. 2) Opening Demat and trading account — Demat account with depository participant (NSDL/CDSL); trading account with the broker. 3) Placing the order — buy/sell order placed with broker (online or offline). 4) Executing the order — broker enters the order in the exchange's electronic trading system; system matches buy and sell orders by price and time priority. 5) Settlement of the trade — on T+1 basis: shares move from seller's Demat to buyer's Demat through depository; funds move from buyer to seller through clearing corporation. Contract note is issued by broker confirming trade details.
Q28 6 Marks

Discuss the objectives and any four functions of SEBI.

View sample solutionHide solution
Objectives: 1) Regulate stock exchanges and securities industry. 2) Protect investors. 3) Prevent malpractices. 4) Promote efficient services by intermediaries. Functions — Regulatory: Registration of brokers, sub-brokers, mutual funds; Regulation of stock exchanges; Regulation of takeovers; Conducting inquiries and audit. Development: Investor education and training of intermediaries; Promotion of fair practices and code of conduct; Conducting research and publishing information. Protective: Prohibiting fraudulent and unfair trade practices like insider trading; Promoting fair practices; Educating investors so that they can make informed decisions.
Q29 6 Marks

A company plans to raise Rs 500 crore via IPO. Discuss any five methods of floatation it can choose between and recommend.

View sample solutionHide solution
Methods: 1) Offer through prospectus — invites public via prospectus, listed on stock exchanges. Suitable for large issue with wide reach. 2) Private placement — sells securities to ≤200 selected institutional investors. Lower cost but no widespread distribution. 3) Rights issue — offers shares to existing shareholders in proportion to holdings. Useful for further issues, not for IPO. 4) e-IPO — uses electronic system of stock exchange to make IPO. Saves time and cost. 5) Offer for sale — sells to brokers/issue houses who in turn sell to public. Reduces direct burden on company. Recommendation: For Rs 500 crore IPO with wide investor base, e-IPO/Offer through prospectus is best — large-scale reach, transparent pricing through book building and SEBI-regulated process.
Q30 6 Marks

Explain any five money market instruments.

View sample solutionHide solution
1) Treasury Bill (T-Bill) — issued by RBI on behalf of Government of India; maturity 14-364 days; zero-coupon (issued at discount, redeemed at face value); risk-free; minimum amount Rs 25000. 2) Commercial Paper — unsecured short-term promissory note issued by large credit-worthy companies; maturity 15 days to 1 year; used for bridge financing and seasonal needs. 3) Call Money — short-term finance with maturity from one day up to 15 days; used between banks to maintain CRR; interest rate is the call rate, very volatile. 4) Certificate of Deposit (CD) — unsecured negotiable instrument issued by commercial banks and financial institutions; maturity 91 days to 1 year (banks), up to 3 years (FIs); helps banks raise funds during tight liquidity. 5) Commercial Bill (Trade Bill) — bill of exchange used to finance working capital needs of businesses; can be discounted with banks; negotiable instrument.
Q31 6 Marks

Discuss the functions of financial market and distinguish between money market and capital market.

View sample solutionHide solution
Functions of financial market: 1) Mobilisation of savings and channelising into productive uses. 2) Facilitate price discovery through demand and supply. 3) Provide liquidity to financial assets. 4) Reduce cost of transactions by providing valuable information. Money market vs Capital market: Period (≤1 year vs >1 year); Instruments (T-Bills CP CD Call money vs Equity Debentures Bonds); Liquidity (high vs comparatively less); Participants (RBI banks financial institutions vs banks financial institutions FIIs retail investors); Risk (low credit and market risk vs higher); Returns (low vs high); Regulator (RBI vs SEBI).
Assertion–Reason Questions 8 questions
Q32 1 Mark

Assertion (A): Money market deals in short-term funds.

Reason (R): Maturity period of money market instruments is up to one year hence they fund short-term needs.

Show explanationHide explanation
Correct answer: Option 1 — Both A and R are true, and R is the correct explanation of A.
Q33 1 Mark

Assertion (A): Stock exchange provides liquidity to existing securities.

Reason (R): It allows investors to buy and sell securities readily at fair market prices.

Show explanationHide explanation
Correct answer: Option 1 — Both A and R are true, and R is the correct explanation of A.
Q34 1 Mark

Assertion (A): SEBI was made statutory in 1992.

Reason (R): The SEBI Act 1992 was enacted to give it statutory powers to regulate the securities market.

Show explanationHide explanation
Correct answer: Option 1 — Both A and R are true, and R is the correct explanation of A.
Q35 1 Mark

Assertion (A): Treasury Bills are zero-coupon instruments.

Reason (R): They are issued at a discount and redeemed at face value the difference being the implicit interest.

Show explanationHide explanation
Correct answer: Option 1 — Both A and R are true, and R is the correct explanation of A.
Q36 1 Mark

Assertion (A): Dematerialisation has reduced settlement risk.

Reason (R): Shares are held electronically in demat accounts removing the risks of physical handling and forgery.

Show explanationHide explanation
Correct answer: Option 1 — Both A and R are true, and R is the correct explanation of A.
Q37 1 Mark

Assertion (A): Financial markets play a crucial role in mobilizing savings.

Reason (R): They provide a platform for investors to trade securities and earn returns.

Show explanationHide explanation
Correct answer: Option 1 — Both A and R are true, and R is the correct explanation of A.
Q38 1 Mark

Assertion (A): The money market deals with long-term securities.

Reason (R): It is primarily concerned with the borrowing and lending of short-term funds.

Show explanationHide explanation
Correct answer: Option 4 — A is false, but R is true.
Q39 1 Mark

Assertion (A): The capital market includes both the primary and secondary markets.

Reason (R): The capital market is exclusively for the trading of government securities.

Show explanationHide explanation
Correct answer: Option 3 — A is true, but R is false.
Statement-Based Questions 8 questions
Q40 1 Mark

Statement 1: Primary market is also called new issue market.

Statement 2: Companies raise fresh capital here.

Show answerHide answer
Correct answer: Option 1 — Both statements are true.
Q41 1 Mark

Statement 1: Commercial paper is unsecured and short-term.

Statement 2: It is issued by large credit-worthy companies.

Show answerHide answer
Correct answer: Option 1 — Both statements are true.
Q42 1 Mark

Statement 1: Stock exchange has a mechanism for price discovery.

Statement 2: Continuous buying and selling reflects fair market value.

Show answerHide answer
Correct answer: Option 1 — Both statements are true.
Q43 1 Mark

Statement 1: Indian stock exchanges follow T+1 settlement.

Statement 2: Trades are settled within one working day after the trade date in dematerialised form.

Show answerHide answer
Correct answer: Option 1 — Both statements are true.
Q44 1 Mark

Statement 1: SEBI regulates merchant bankers.

Statement 2: SEBI also protects interests of retail investors.

Show answerHide answer
Correct answer: Option 1 — Both statements are true.
Q45 1 Mark

Statement 1: The primary market is where new securities are issued and sold for the first time.

Statement 2: The secondary market involves the buying and selling of existing securities.

Show answerHide answer
Correct answer: Option 1 — Both statements are true.
Q46 1 Mark

Statement 1: The money market deals with short-term funds, typically for a period of up to one year.

Statement 2: The capital market is primarily concerned with long-term investments.

Show answerHide answer
Correct answer: Option 1 — Both statements are true.
Q47 1 Mark

Statement 1: SEBI is responsible for regulating the stock exchanges in India.

Statement 2: SEBI's main function is to provide loans to companies in need of capital.

Show answerHide answer
Correct answer: Option 2 — Only Statement 1 is true.
Case Study / Passage Questions 4 questions
Q48 3 Marks
DataGrid a 5-year-old SaaS startup plans an IPO of Rs 800 crore. Steps undertaken: appoint merchant banker (lead manager); file Draft Red Herring Prospectus (DRHP) with SEBI; SEBI raises observations company addresses them; price band fixed Rs 350-400; book building over 3 days; final price Rs 380; allotment to retail QIB and non-institutional categories; listing on NSE BSE. On Day 1 listing share opens at Rs 450 — 18% premium.
  1. An IPO is a function of which market?
    APrimary
    BSecondary
    CBoth
    DNeither
  2. DRHP is filed with:
    ASEBI
    BRBI
    CStock exchange
    DGovt
  3. Trace the IPO process and the role of SEBI.
Show answersHide answers
1. Option 1 — Primary
2. Option 1 — SEBI
3. IPO (Initial Public Offer) is the first public sale of shares — happens in the PRIMARY market. Process: (1) Appointment of merchant banker / lead manager — manages the issue; (2) Drafting of DRHP (Draft Red Herring Prospectus) with full company financials risks objects of issue; (3) Filing with SEBI which reviews and gives comments; (4) Filing of RHP with Registrar of Companies; (5) Marketing roadshow; (6) Price band announcement and book building (3 days); (7) Bid collection from retail (35% reservation), QIB (50%), non-institutional (15%); (8) Final price discovery and allotment; (9) Listing on stock exchange — secondary market trading begins. Listing premium reflects market enthusiasm. SEBI's role: investor protection; due diligence on disclosures; uniform process. Primary market raises new capital; secondary market provides liquidity to existing securities.
Q49 3 Marks
Mr Bose opens a Demat account with HDFC and a trading account with Zerodha. He places an online order to buy 100 shares of Reliance at Rs 2500. The system matches his buy order with a seller's sell order at the best price. Trade is confirmed. T+1 settlement: shares enter his Demat account and Rs 250000 (plus brokerage and STT) is debited.
  1. Indian stock market settlement is now:
    AT+0
    BT+1
    CT+2
    DT+5
  2. For trading shares an investor needs:
    ADemat
    BTrading
    CBoth required
    DEither
  3. Trace the steps in stock exchange trading and explain the role of Demat.
Show answersHide answers
1. Option 2 — T+1
2. Option 3 — Both required
3. Stock exchange trading procedure: (1) investor opens Demat account with depository participant (NSDL CDSL) and trading account with broker; (2) places buy/sell order through broker (online or phone); (3) order goes to exchange's electronic trading system; (4) system matches buy and sell orders by price-time priority; (5) trade confirmed; (6) settlement on T+1 — securities move from seller's Demat to buyer's Demat and funds move from buyer's bank to seller's bank through clearing corporation; (7) contract note issued by broker. Charges: brokerage; STT (Securities Transaction Tax); GST; SEBI turnover fee; stamp duty; depository charges. Stock exchange functions: liquidity to existing securities; price discovery via demand-supply; safety through SEBI regulation; capital formation; spreading equity cult; speculation in restricted manner. Dematerialisation has reduced settlement risk and made trading paperless.
Q50 3 Marks
At MegaCorp two days before quarterly results were announced (poor profit) the CFO sold 50000 shares. Results announced — share fell 15%. SEBI received a tip off and investigated. CFO had non-public information — classic insider trading. SEBI imposed penalty of Rs 5 crore disgorged profits and barred CFO from market for 5 years.
  1. SEBI's primary role here was:
    AInvestor protection
    BTax collection
    CStock pricing
    DCurrency
  2. Trading on non-public information is:
    AYes legal
    BIllegal
    COptional
    DRandom
  3. Discuss SEBI's role in protecting investors with reference to this case.
Show answersHide answers
1. Option 1 — Investor protection
2. Option 2 — Illegal
3. Insider trading is using material non-public information for personal trading gain — illegal under SEBI (Prohibition of Insider Trading) Regulations 2015. SEBI's enforcement powers: (1) regulatory — registration of intermediaries regulation of stock exchanges and listed companies; (2) developmental — investor education promoting fair practices; (3) protective — prohibiting insider trading market manipulation misleading announcements. Penalties: monetary fines disgorgement of profits market bans criminal prosecution. SEBI was set up in 1988 made statutory in 1992. Functions: protects investors regulates markets prevents fraudulent practices educates investors. The case shows SEBI's protective role — without strong enforcement insiders would profit at the cost of common investors and trust in markets would erode. SEBI uses surveillance algorithms whistleblower tips and forensic audit to detect insider trading.
Q51 4 Marks
Ramesh is a small investor who wants to invest his savings in the stock market. He approaches a broker who explains to him the concept of dematerialization. The broker tells Ramesh that he needs to open a Demat account with a Depository Participant (DP). In India, there are two depositories — NSDL (National Securities Depository Limited) and CDSL (Central Depository Securities Limited). The broker further explains that in the dematerialized form, securities are held electronically, eliminating the risks associated with physical certificates such as theft, forgery, and damage. Ramesh is also informed that before trading, he must complete KYC (Know Your Customer) formalities. The broker explains the step-by-step trading procedure on a stock exchange, including placing an order, execution, and settlement. Ramesh feels confident and decides to invest in the secondary market through the Bombay Stock Exchange (BSE).
  1. What is the process of converting physical share certificates into electronic form called?
    ASecuritization
    BDematerialization
    CDigitization
    DRematerialization
  2. Which of the following is NOT a depository operating in India?
    ANSDL
    BCDSL
    CSEBI
    DBoth NSDL and CDSL are depositories
  3. Explain any two advantages of holding securities in dematerialized form.
  4. Ramesh invests in the secondary market through BSE. What is the primary function of the secondary market?
Show answersHide answers
1. Option 2 — Dematerialization
2. Option 3 — SEBI
3. Two advantages of dematerialization are: (1) Elimination of risks associated with physical certificates such as theft, loss, forgery, and damage. (2) Easy and quick transfer of securities electronically, reducing paperwork and transaction time.
4. The primary function of the secondary market (stock exchange) is to provide liquidity to existing securities by enabling investors to buy and sell previously issued securities. It provides a ready market for investors to exit their investments and helps in price discovery of securities.
Table-Based Questions 4 questions
Q52 3 Marks

Money market vs Capital market:

AspectMoney marketCapital market
Period≤ 1 year> 1 year
InstrumentsT-bills CP CD Call moneyEquity Debentures Bonds
LiquidityHighComparatively less
ReturnsLowHigher
RiskLowHigher
RegulatorRBISEBI
  1. Treasury Bills are traded in the:
    AMoney market
    BCapital market
    CBoth
    DNeither
  2. Capital market is regulated by:
    ARBI
    BSEBI
    CGovt
    DStock exchange
  3. Compare money market and capital market.
Show answersHide answers
1. Option 1 — Money market
2. Option 2 — SEBI
3. Money market deals in short-term funds (≤ 1 year): T-bills (issued by RBI for govt) commercial paper (corporate short-term notes) call money (interbank overnight) certificate of deposit (banks) commercial bills (trade). Used by RBI for monetary policy by banks for liquidity by corporates for working capital. Low risk low return high liquidity regulated by RBI. Capital market deals in long-term funds (> 1 year): equity (shares) debentures (corporate bonds) government bonds. Used to fund long-term investments by firms and government. Higher risk higher return less liquid regulated by SEBI. Capital market split into: primary (new issues — IPO rights private placement) and secondary (stock exchange trading). Both markets are essential — money market for short-term liquidity capital market for long-term capital formation. Healthy markets need both.
Q53 3 Marks

Money market instruments:

InstrumentIssuerTenure
Treasury BillRBI for Govt14-364 days
Commercial PaperLarge corporates15 days-1 year
Call MoneyBanks to banks1-15 days
Certificate of DepositBanks/FIs91 days-1 year
Commercial BillTrade between firmsUp to 90 days typically
  1. Issued by RBI on behalf of Government:
    ATreasury Bill
    BCommercial Paper
    CCall Money
    DBond
  2. Inter-bank overnight borrowing market is:
    ATreasury Bill
    BCommercial Paper
    CCall Money
    DEquity
  3. Explain any five money market instruments.
Show answersHide answers
1. Option 1 — Treasury Bill
2. Option 3 — Call Money
3. Money market instruments are short-term debt instruments. Treasury Bill (T-Bill): issued by RBI on behalf of Government 14-364 days zero-coupon (issued at discount redeemed at face value); risk-free; minimum Rs 25000. Commercial Paper (CP): unsecured short-term promissory note by large credit-worthy corporates 15 days-1 year used for working capital and bridge financing. Call Money: interbank short-term up to 15 days used by banks to maintain CRR; rate is volatile call rate. Certificate of Deposit (CD): unsecured negotiable instrument by banks/FIs 91 days-1 year helps banks raise funds during tight liquidity. Commercial Bill (Trade Bill): bill of exchange used to finance working capital; can be discounted with banks. Together these instruments form the short-term debt market regulated by RBI ensuring monetary policy transmission and short-term liquidity.
Q54 6 Marks

Distinguish between money market and capital market instruments.

AspectMoney marketCapital market
Period? ≤ 1 year? > 1 year
Instruments? T-Bills CP CD Call money? Equity Debentures Bonds
Liquidity? High? Less
Returns? Low? Higher
Risk? Low? Higher
Regulator? RBI? SEBI
Q55 6 Marks

Match each role/function in the stock market to the correct entity.

FunctionEntity
Statutory regulator? SEBI
Trading platform? Stock exchange (NSE/BSE)
Settles trades? Clearing corporation
Holds shares electronically? Depository (NSDL/CDSL)
Manages an IPO? Merchant banker
Rates debentures? Credit rating agency
Opens Demat for investor? Depository participant
Picture-Based Questions 3 questions
Q56 3 Marks

Study the financial markets diagram and answer:

Financial Markets figure
  1. Treasury Bills are traded in the:
    AMoney market
    BCapital market
    CBoth
    DNeither
  2. Capital market is regulated by:
    ARBI
    BSEBI
    CGovt
    DStock exchange
  3. Compare money market and capital market with examples of instruments.
Show answersHide answers
1. Option 1 — Money market
2. Option 2 — SEBI
3. Financial markets have two main segments. Money market deals in short-term funds (≤ 1 year): T-bills (issued by RBI for govt, 14-364 days), commercial paper (corporate short-term notes, 15 days-1 year), call money (interbank, 1-15 days), certificate of deposit (banks, 91 days-1 year), commercial bills (trade, up to 90 days). Used by RBI for monetary policy, by banks for liquidity, by corporates for working capital. Low risk, low return, high liquidity, regulated by RBI. Capital market deals in long-term funds (> 1 year): equity (shares), debentures, bonds. Used to fund long-term investments. Higher risk, higher return, less liquid, regulated by SEBI. Capital market splits into primary (new issues — IPO, rights, private placement) and secondary (stock exchange trading existing securities). Both markets are essential — money market for short-term liquidity, capital market for long-term capital formation.
Q57 20 Marks

Based on the given diagram, answer the following:

Financial Markets figure
  1. Which of the following is an instrument of the Money Market?
    AEquity Shares
    BDebentures
    CTreasury Bills
    DMutual Funds
  2. What is the main difference between the Primary Market and the Secondary Market?
  3. Which financial market deals with short-term funds having a maturity period of up to one year?
    ACapital Market
    BMoney Market
    CPrimary Market
    DSecondary Market
  4. Name any two functions performed by Financial Markets.
  5. When a company issues shares to the public for the first time, it is called:
    AFollow-on Public Offer (FPO)
    BRights Issue
    CInitial Public Offer (IPO)
    DPrivate Placement
  6. What is meant by 'Rights Issue' as a method of floatation in the Primary Market?
  7. In which method of floatation are securities sold directly to a small group of investors such as financial institutions, mutual funds, or banks?
    APublic Issue
    BOffer for Sale
    Ce-IPO
    DPrivate Placement
  8. Distinguish between 'Offer for Sale' and 'Public Issue' as methods of raising capital in the Primary Market.
  9. SEBI was established as a statutory body under which Act?
    ASEBI Act, 1988
    BSEBI Act, 1992
    CCompanies Act, 1956
    DSecurities Act, 1990
  10. What is 'Insider Trading' and why does SEBI prohibit it?
  11. Which of the following is a Regulatory Function of SEBI?
    AProhibiting fraudulent and unfair trade practices
    BPromoting investor education
    CRegistration and regulation of brokers and sub-brokers
    DTraining of intermediaries of securities market
  12. Explain 'Price Rigging' and how SEBI's protective functions help prevent it.
  13. What is a 'Demat Account' and why is it necessary for trading on a stock exchange?
  14. In the current rolling settlement system, T+2 means:
    ATrade is settled 2 months after the transaction date
    BTrade is settled 2 working days after the transaction date
    CTrade is settled 2 weeks after the transaction date
    DTrade must be confirmed within 2 hours
  15. A 'Contract Note' issued after trade confirmation serves as:
    AA certificate of company ownership
    BA legal document confirming the trade details between broker and client
    CA receipt of dividend payment
    DAn application form for IPO
  16. What is the role of a Depository in the settlement of securities transactions?
  17. Which of the following capital market instruments gives its holder ownership rights in the company?
    ADebentures
    BBonds
    CEquity Shares
    DPreference Shares
  18. What is the key difference between debentures and equity shares as shown in the diagram?
  19. Which capital market instrument shown in the diagram is typically issued by the Government or Public Sector Undertakings (PSUs)?
    AEquity Shares
    BPreference Shares
    CDebentures
    DBonds
  20. Why are preference shares considered safer than equity shares from an investor's perspective? Use the diagram to support your answer.
  21. Under which category of SEBI's functions does 'Checking Insider Trading' fall?
    ADevelopmental Functions
    BRegulatory Functions
    CProtective Functions
    DAdministrative Functions
  22. What is insider trading, and why does SEBI prohibit it?
  23. Which of the following is a Developmental Function of SEBI as shown in the diagram?
    ARegistration of Brokers
    BAudit of Stock Exchanges
    CTraining of Intermediaries
    DRegulates Takeovers
  24. Explain how SEBI's Regulatory Functions, as depicted in the diagram, help in maintaining discipline in the securities market.
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1. Option 3 — Treasury Bills
2. The Primary Market deals with the issue of new securities for the first time (fresh capital is raised), whereas the Secondary Market deals with the buying and selling of existing/previously issued securities among investors.
3. Option 2 — Money Market
4. Two functions of Financial Markets are: (1) Mobilisation of savings and channelising them into productive uses. (2) Facilitating price discovery of financial assets through the interaction of buyers and sellers.
5. Option 3 — Initial Public Offer (IPO)
6. Rights Issue refers to the issue of new shares to the existing shareholders of the company in proportion to their current shareholding. It gives existing shareholders the right to subscribe to new shares before they are offered to the general public.
7. Option 4 — Private Placement
8. In a Public Issue, the company directly offers new shares to the general public through a prospectus and the proceeds go to the company. In an Offer for Sale, existing shareholders (such as promoters) sell their already-held shares to the public through intermediaries; the proceeds go to the selling shareholders, not to the company.
9. Option 2 — SEBI Act, 1992
10. Insider Trading refers to the buying or selling of securities by persons who have access to non-public, price-sensitive information about the company (e.g., directors, employees). SEBI prohibits it because it gives unfair advantage to insiders over ordinary investors, undermining market integrity and investor confidence.
11. Option 3 — Registration and regulation of brokers and sub-brokers
12. Price Rigging refers to the deliberate manipulation of the prices of securities by certain parties to deceive investors — artificially inflating or deflating prices for personal gain. SEBI's protective functions prevent this by monitoring market transactions, investigating suspicious activities, and penalising those found guilty of manipulating prices, thereby protecting investors' interests.
13. A Demat (Dematerialised) Account is an account that holds shares and securities in electronic form, eliminating the need for physical share certificates. It is necessary for trading on a stock exchange because SEBI mandates that all securities transactions be settled in dematerialised form, making the process faster, safer, and free from risks like theft or forgery of physical certificates.
14. Option 2 — Trade is settled 2 working days after the transaction date
15. Option 2 — A legal document confirming the trade details between broker and client
16. A Depository is an institution that holds securities (shares, bonds, debentures) in electronic form on behalf of investors. During settlement, the depository facilitates the transfer of securities from the seller's Demat account to the buyer's Demat account electronically, while the corresponding funds are transferred through the banking system. In India, NSDL and CDSL are the two main depositories.
17. Option 3 — Equity Shares
18. Debentures carry a fixed rate of interest and do not confer ownership rights on the holder, whereas equity shares give ownership rights and carry a variable dividend depending on the company's profits.
19. Option 4 — Bonds
20. Preference shares are considered safer because they carry a fixed dividend, meaning investors receive a predetermined return regardless of profit fluctuations. Additionally, preference shareholders have priority in repayment over equity shareholders in the event of liquidation, reducing the risk of loss.
21. Option 3 — Protective Functions
22. Insider trading refers to the buying or selling of securities by persons who have access to non-public, price-sensitive information about a company. SEBI prohibits it because it gives an unfair advantage to insiders over ordinary investors, undermining market integrity and investor confidence.
23. Option 3 — Training of Intermediaries
24. SEBI's Regulatory Functions include registration of brokers (ensuring only qualified intermediaries operate), regulating takeovers (preventing hostile or unfair acquisitions), and conducting audits of stock exchanges (ensuring compliance with rules). Together, these functions create a disciplined, transparent, and well-governed securities market, protecting all stakeholders and maintaining investor confidence.
Q58 4 Marks

Based on the given chart, answer the following:

Financial Markets figure
  1. Which of the following instruments has the shortest maturity period in the Money Market?
    ATreasury Bills
    BCommercial Paper
    CCall Money
    DCertificate of Deposit
  2. What is 'Commercial Paper' and who can issue it?
  3. Treasury Bills are issued by which authority in India?
    AState Governments
    BReserve Bank of India on behalf of the Central Government
    CSecurities and Exchange Board of India
    DNational Stock Exchange
  4. On the basis of maturity period, how does the Money Market differ from the Capital Market? Give one example of an instrument from each.
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1. Option 3 — Call Money
2. Commercial Paper (CP) is an unsecured, short-term promissory note issued by large, creditworthy corporations to raise short-term funds, typically for meeting working capital requirements. It can be issued by large companies with a high credit rating. Its maturity period ranges from 15 days to 1 year.
3. Option 2 — Reserve Bank of India on behalf of the Central Government
4. The Money Market deals with short-term financial instruments with a maturity period of up to one year (e.g., Treasury Bills, Commercial Paper). The Capital Market deals with medium and long-term financial instruments with a maturity period of more than one year (e.g., Equity Shares, Debentures). The Money Market provides liquidity for short-term needs, while the Capital Market mobilises long-term savings for investment in productive assets.
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