Worksheets Chapter 10 Financial Markets Class 12 Business Studies

Students should refer to Worksheets Class 12 Business Studies Financial Markets Chapter 10 provided below with important questions and answers. These important questions with solutions for Chapter 10 Financial Markets have been prepared by expert teachers for Class 12 Business Studies based on the expected pattern of questions in the Class 12 exams. We have provided Worksheets for Class 12 Business Studies for all chapters on our website. You should carefully learn all the important examinations questions provided below as they will help you to get better marks in your class tests and exams.

Financial Markets Worksheets Class 12 Business Studies

One Mark Questions :

Question. The National Stock Exchange of India was recognized as Stock Exchange in the year
(a) 1999
(b) 1993
(c) 1994
(d) 1995

Question. A Treasury bill is basically
(a) An instrument to borrow short term funds
(b) An instrument to borrow long term funds
(c) An instrument of capital market
(d) None of the above

Question. Primary and secondary markets
(a) Compete with each other
(b) Complement each other
(c) Function independently
(d) Control each other

Question. The settlement cycle in NSE is
(a) T+5
(b) T+3
(c) T+2
(d) T+1

Question. What is Stock Exchange?
Answer: A stock exchange is an institution which provides a platform for buying and selling of existing securities.

Question. What is the benchmark index of BSE?
Answer: The SENSEX is the benchmark index of BSE.

Question. What is the benchmark index of NSE?
Answer: The NIFTY is the benchmark index of NSE.

Question. Give the meaning of Dematerialization.
Answer: It is process where securities held by the investor in the physical form are cancelled and the investor is given an electronic entry or number so that she/he can hold it as an electronic balance in an account.

Question. Expand IPO/BSE/NSEI/SEBI/NASDAQ/OTCEI/CSDL
Answers:
• IPO: Initial Public Offer
• BSE: Bombay Stock Exchange Ltd.
• NSEI: National Stock Exchange Of India
• SEBI: Securities And Exchange Board Of India
• NASDAQ: National Association Of Securities Dealers Automated Quotations
• OTCEI: Over The Counter Exchange Of India
• CSDL: Central Depository Services Limited

Question. What is Money Market?
Answer: Money market is a market for short term funds which deals in monetary assets whose period of maturity is upto one year.

Question. Name the first and the largest depository presently operational in India.
Answer: NSDL – National Securities Depositories Limited is the first and the largest depository presently operational in India.

Question. What is meant by Depository?
Answer: Depository is an institution/ organisation which holds securities (e.g., shares, debentures, bonds, mutual funds, etc) in electronic form, in which trading is done. It is like a bank and keeps securities in electronic form on behalf of the investor.

Two Mark Questions :

Question. State any two Money Market Instruments.
Answer:
1. Treasury Bill.
2. Commercial Paper.
3. Call Money.
4. Certificate of Deposit
5. Commercial Bill

Question. What is Treasury Bill/Commercial Paper/Call Money/Certificate of Deposit/Commercial Bill?
Answer:
1. Treasury bill: A Treasury bill is basically an instrument of short-term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by the Reserve Bank of India on behalf of the Central Government to meet its short-term requirement of funds. They are issued at a price which is lower than their face value and repaid at par.
2. Commercial Paper: Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. It is sold at a discount and redeemed at par.
1. Call Money: Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. When RBI changes the cash reserve ratio from time to time, which in turn affects the amount of funds available to be given as loans by commercial banks, hence, they depend on call money where in they borrow from other commercial banks to maintain cash reserve ratio.
The interest rate paid on call money loan is known as call money rate.
2. Certificate of Deposit: Certificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions. They help to mobilise a large amount of money for short periods.
3. Commercial Bill: A commercial bill is a short-term, negotiable, self-liquidating instrument which is used to finance the credit sales of firms. When goods are sold on credit, the buyer becomes liable to make payment on a specific date in future. When a trade bill is accepted by a commercial bank it is known as a commercial bill.

Question. What is Financial Market?
Answer: A financial market is a market for the creation and exchange of financial assets. Creation of financial assets takes place when a company issues new shares and debentures. Exchange of financial assets implies purchase and sale of existing shares, debentures and bonds.

Question. State any two functions of Financial Market.
Answer:
1. Mobilization of Savings and Channeling them into the most Productive Uses.
2. Facilitate Price Discovery.
3. Providing liquidity to financial assets.
4. Reducing the cost of Transaction.

Question. Distinguish between primary market and secondary market .
Answer: 

Primary Market	Secondary market
Securities are sold by the company to the investor directly.	Ownership of existing securities is exchanged between investors. The company is not involved at all.
Only buying of securities takes place in the primary market. Securities cannot be sold there.	Both the buying and the selling of securities can take place on the stock exchange.

Question. Name the Market Segments of NSE.
Answer:
1. Whole sale Debt market segment
2. Capital market segment

Question. State any two objectives of SEBI.
Answer:
1. To regulate stock exchanges and the securities industry to promote their orderly functioning.
2. To protect the rights and interests of investors, particularly individual investors and to guide and educate them.
3. To prevent trading malpractices and achieve a balance between self-regulation by the securities industry and its statutory regulation.

Question. Give the meaning of Capital Market.
Answer: The term capital market refers to facilities and institutional arrangements through which long-term funds, both debt and equity are raised and invested. It directs these savings into their most productive use leading to growth and development of the economy. The capital market consists of development banks, commercial banks and stock exchanges.

Question. Write any two advantages of ‘Electronic Trading System’ in Stock exchanges.
Answer:
1. It ensures transparency as it allows participants to see the prices of all securities in the market while business is being transacted.
2. It increases efficiency of operations since there is reduction in time, cost and risk of error

Question. Name any two details that need to be provided by the investor to the broker while filling a client registration form.
Answer:
1. PAN number (This is mandatory)
2. Date of birth and address
3. Educational qualification and occupation.
4. Residential status

Four Mark Questions :

Question. Explain briefly the functions of a financial market.
Answer:
Financial markets play an important role in the allocation of scarce resources in an economy by performing the following four important functions.
1. Mobilization of Savings and Channeling them into the most Productive Uses: A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channelize surplus funds into the most productive use.
2. Facilitating Price Discovery: You all know that the forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
3. Providing Liquidity to Financial Assets: Financial markets facilitate easy purchase and sale of financial assets. In doing so they provide liquidity to financial assets, so that they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanism of the financial market.
4. Reducing the Cost of Transactions: Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other. Instruments with a maturity of less than one year are traded in the money market. Instruments with longer maturity.

Question. Explain any four methods of floating new issues in the primary market.
Answer:
There are various methods of floating new issues in the primary market:
1. Offer through Prospectus: Offer through prospectus is the most popular method of raising funds by public companies in the primary market. This involves inviting subscription from the public through issue of prospectus. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines.
2. Offer for Sale: Under this method securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers. In this case, a company sells securities enbloc at an agreed price to brokers who, in turn, resell them to the investing public.
3. Private Placement: Private placement is the allotment of securities by a company to institutional investors and some selected individuals. It helps to raise capital more quickly than a public issue. Some companies, therefore, cannot afford a public issue and choose to use private placement.
4. Rights Issue: This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholders are offered the ‘right’ to buy new shares in proportion to the number of shares they already possess.
5. e-IPOs: A company proposing to issue capital to the public through the on-line system of the stock exchange has to enter into an agreement with the stock exchange. This is called an Initial Public Offer (IPO). The lead manager coordinates all the activities amongst intermediaries connected with the issue.

Question. Write any 4 advantages of Electronic Trading System in stock exchanges.
Answer:
Electronic trading systems or screen-based trading has certain advantages:
1. It ensures transparency as it allows participants to see the prices of all securities in the market while business is being transacted. They are able to see the full market during real time.
2. It increases efficiency of information being passed on, thus helping in fixing prices efficiently. The computer screens display information on prices and also capital market developments that influence share prices.
3. It increases the efficiency of operations, since there is reduction in time, cost and risk of error.
4. People from all over the country and even abroad who wish to participate in the stock market can buy or sell securities through brokers or members without knowing each other.
5. A single trading platform has been provided as business is transacted at the same time in all the trading centers. Thus, all the trading centers spread all over the country have been brought onto one trading platform, i.e., the stock exchange, on the computer.

Question. Distinguish between primary market and secondary market
Answer: 

Sl. NO	Primary Market	Secondary Market
1	There is sale of securities by new companies or further (new issues of securities by existing companies to investors).	There is trading of existing shares only.
2	Securities are sold by the company to the investor directly (or through an intermediary).	Ownership of existing securities is exchanged between investors. The company is not involved at all.
3	The flow of funds is from savers to investors, i.e. the primary market directly promotes capital formation.	Enhances encashability (liquidity) of shares, i.e. the secondary market indirectly promotes capital formation.
4	Only buying of securities takes place in the primary market, securities cannot be sold there.	Both the buying and the selling of securities can take place on the stock exchange.
5	Prices are determined and decided by the management of the company.	Prices are determined by demand and supply for the security.
6	There is no fixed geographical location.	Located at specified places.

Question. Briefly Explain any 4 money market instruments:
Answer:
1. Treasury bill: A Treasury bill is basically an instrument of short-term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by the Reserve Bank of India on behalf of the Central Government to meet its short-term requirement of funds. They are issued at a price which is lower than their face value and repaid at par.
2. Commercial Paper: Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. It is sold at a discount and redeemed at par.
4. Call Money: Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. When RBI changes the cash reserve ratio from time to time, which in turn affects the amount of funds available to be given as loans by commercial banks, hence, they depend on call money where in they borrow from other commercial banks to maintain cash reserve ratio.
The interest rate paid on call money loan is known as call money rate.
3. Certificate of Deposit: Certificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions. They help to mobilise a large amount of money for short periods.
4. Commercial Bill: A commercial bill is a short-term, negotiable, self-liquidating instrument which is used to finance the credit sales of firms. When goods are sold on credit, the buyer becomes liable to make payment on a specific date in future. When a trade bill is accepted by a commercial bank it is known as a commercial bill.

Question. State the objectives of securities and exchange board of India.
Answer:
The overall objective of SEBI is to protect the interests of investors and to promote the development of, and regulate the securities market. This may be elaborated as follows:
1.To regulate stock exchanges and the securities industry to promote their orderly functioning.
2.To protect the rights and interests of investors, particularly individual investors and to guide and educate them.
3.To prevent trading malpractices and achieve a balance between self-regulation by the securities industry and its statutory regulation.
4.To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc., with a view to making them competitive and professional.

Five Mark Questions :

Question. What is Stock Exchange? Explain the functions of stock exchange.
Answer:
A stock exchange is an institution which provides a platform for buying and selling of existing securities. As a market, the stock exchange facilitates the exchange of a security (share, debenture etc.) into money and vice versa.
Functions of a Stock Exchange:
The following are some of the important functions of a stock exchange.
1. Providing Liquidity and Marketability to Existing Securities
2. Pricing of Securities
3. Safety of Transaction
4. Contributes to Economic Growth
5. Spreading of Equity Cult
6. Providing Scope for Speculation
1. Providing Liquidity and Marketability to Existing Securities: The basic function of a stock exchange is the creation of a continuous market where securities are bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity and easy marketability to already existing securities in the market.
2. Pricing of Securities: Share prices on a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market.
3. Safety of Transaction: The membership of a stock exchange is wellregulated and its dealings are well defined according to the existing legal framework. This ensures that the investing public gets a safe and fair deal on the market.
4. Contributes to Economic Growth: A stock exchange is a market in which existing securities are resold or traded. Through this process of disinvestment and reinvestment savings get channelised into their most productive investment avenues. This leads to capital formation and economic growth.
5. Spreading of Equity Cult: The stock exchange can play a vital role in ensuring wider share ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments.
6. Providing Scope for Speculation: The stock exchange provides sufficient scope within the provisions of law for speculative activity in a restricted and controlled manner. It is generally accepted that a certain degree of healthy speculation is necessary to ensure liquidity and price continuity in the stock market.

Question. Briefly explain the steps in the Screen based Trading and Settlement procedure in a Stock Exchange.
Answer:
Trading in securities is now executed through an on-line, screen-based electronic trading system. Simply put, all buying and selling of shares and debentures are done through a computer terminal. There was a time The following steps are involved in the screen-based trading for buying and selling of securities:
1. If an investor wishes to buy or sell any security he has to first approach a registered broker or sub-broker and enter into an agreement with him. The investor has to sign a broker-client agreement and a client registration form before placing an order to buy or sell securities. He has also to provide certain other details and information.
These include:
• PAN number (This is mandatory)
• Date of birth and address.
• Educational qualification and occupation.
• Residential status (Indian/NRI).
• Bank account details.
• Depository account details.
• Name of any other broker with whom registered.
• Client code number in the client registration form.
The broker then opens a trading account in the name of the investor.
2. The investor has to open a ‘demat’ account or ‘beneficial owner’ (BO) account with a depository participant (DP) for holding and transferring securities in the
demat form. He will also have to open a bank account for cash transactions in the securities market.
3. The investor then places an order with the broker to buy or sell shares. Clear instructions have to be given about the number of shares and the price at which the shares should be bought or sold. The broker will then go ahead with the deal at the above mentioned price or the best price available. An order confirmation slip is issued to the investor by the broker.
4. The broker then will go on-line and connect to the main stock exchange and match the share and best price available.
5. When the shares can be bought or sold at the price mentioned, it will be communicated to the broker’s terminal and the order will be executed electronically. The broker will issue a trade confirmation slip to the investor.
6. After the trade has been executed, within 24 hours the broker issues a Contract Note. This note contains details of the number of shares bought or sold, the price, the date and time of deal, and the brokerage charges. This is an important document as it is legally enforceable and helps to settle disputes/claims between the investor and the broker. A Unique Order Code number is assigned to each transaction by the stock exchange and is printed on the contract note.
7. Now, the investor has to deliver the shares sold or pay cash for the shares bought. This should be done immediately after receiving the contract note or before the day when the broker shall make payment or delivery of shares to the exchange. This is called the pay-in day.
8. Cash is paid or securities are delivered on pay-in day, which is before the T+2 day as the deal has to be settled and finalised on the T+2 day. The settlement cycle is on T+2 day on a rolling settlement basis, w.e.f. 1 April 2003.
9. On the T+2 day, the exchange will deliver the share or make payment to the other broker. This is called the pay-out day. The broker then has to make payment to the investor within 24 hours of the payout day since he has already received payment from the exchange.
10.The broker can make delivery of shares in demat form directly to the investor’s demat account. The investor has to give details of his demat account and instruct
his depository participant to take delivery of securities directly in his beneficial owner account.

Question. Explain any four money market instruments.
Answer:
Money market is the market for short term funds which deals in monetary assets whose maturity period is upto year. Instruments of money market are as follows:
1. Treasury bill
2. Commercial paper
3. Call Money
4. Certificate of Deposit
5. Commercial paper
Treasury bill: A Treasury bill is basically an instrument of short-term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by the Reserve Bank of India on behalf of the Central Government to meet its short-term requirement of funds. They are issued at a price which is lower than their face value and repaid at par.
Commercial Paper: Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. It is sold at a discount and redeemed at par.
Call Money: Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. When RBI changes the cash reserve ratio from time to time, which in turn affects the amount of funds available to be given as loans by commercial banks, hence, they depend on call money where in they borrow from other commercial banks to maintain cash reserve ratio.
The interest rate paid on call money loan is known as call money rate.
Certificate of Deposit: Certificates of deposit (CD) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions. They help to mobilise a large amount of money for short periods.
Commercial Bill: A commercial bill is a short-term, negotiable, self-liquidating instrument which is used to finance the credit sales of firms. When goods are sold on credit, the buyer becomes liable to make payment on a specific date in future. The seller could wait till the specified date or make use of a bill of exchange. The seller (drawer) of the goods draws the bill and the buyer (drawee) accepts it. On being accepted, the bill becomes a marketable instrument and is called a trade bill. These bills can be discounted with a bank if the seller needs funds before the bill matures. When a trade bill is accepted by a commercial bank it is known as a commercial bill.
Conclusion:
These assets are close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded every day. It has no physical location, but is an activity conducted over the telephone and through the internet.

Question. How does the Demat System works? Explain.
Answer:
Process of holding securities in an electronic form is called dematerialisation. For this, the investor has to open a demat account with an organisation called a depository.
Working of the Demat System:
1. A depository participant (DP), either a bank, broker, or financial services company, may be identified.
2. An account opening form and documentation (PAN card details, photograph, and power of attorney) may be completed.
3. The physical certificate is to be given to the DP along with a dematerialisation request form.
4. If shares are applied in a public offer, simple details of DP and demat account are to be given and the shares on allotment would automatically be credited to the demat account.
5. If shares are to be sold through a broker, the DP is to be instructed to debit the account with the number of shares.
6. The broker then gives instruction to his DP for delivery of the shares to the stock exchange.
7. The broker then receives payment and pay the person for the shares sold.
8. All these transactions are to be completed within 2 days, i.e., delivery of shares and payment received from the buyer is on a T+2 basis, settlement period.

Question. Explain the functions of Securities and Exchange Board of India.
Answer:
Functions of SEBI:
Keeping in mind the emerging nature of the securities market in India, SEBI was entrusted with the twin task of both regulation and development of the securities market.
Regulatory Functions
1. Registration of brokers and sub brokers and other players in the market.
2. Registration of collective investment schemes and Mutual Funds.
3. Regulation of Stock Bankers and portfolio exchanges, and merchant bankers.
4. Prohibition of fraudulent and unfair trade practices.
5. Controlling insider trading and takeover bids and imposing penalties for such practices.
6. Calling for information by undertaking inspection, conducting enquiries and audits of stock exchanges and intermediaries.
7. Levying fee or other charges for carrying out the purposes of the Act.
8. Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as may be delegated by the Government of India.
Development Functions
1. Investor education
2. Training of intermediaries
3. Promotion of fair practices and code of conduct of all SRO’s.
4. Conducting research and publishing information useful to all market participants.
Protective Functions:
1. Prohibition of fraudulent and unfair trade practices like making misleading statements, manipulations, price rigging etc.
2. Controlling insider trading and imposing penalties for such practices.
3. Undertaking steps for investor protection.
4. Promotion of fair practices and code of conduct in securities market.

Practical Oriented Question :

Question. Assuming that you are a promoter of a company and would like to raise capital through primary market. What are the various methods of floating new issues available to you?
Answer: There are various methods of floating new issues in the primary market, these are as follows:
1. Offer through Prospectus
2. Offer for Sale
3. Private Placement
4. Rights Issue
5. e-IPOs