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Maharashtra State Board · HSC Commerce · Class 12 (Std XII)

Class 12 Secretarial Practice Chapter 11: Financial Market

Short notes, key concepts, quick revision and practice MCQs with answers

A financial market brings together investors who have surplus funds and borrowers who need them. The chapter covers its functions, the money market and capital market, their instruments, and the primary and secondary markets.

Key concepts: Financial Market

Financial market
A market where financial assets such as shares, bonds and bills are bought and sold. It collects savings from investors and passes them on to borrowers, acting as an intermediary between the two.
Financial instrument and derivative
A financial instrument is a legal document with money value: an asset for one party and a liability for the other. A derivative gets its value from an underlying asset such as shares, currencies or commodities.
Money market
The market for lending and borrowing funds for a short period, from one day up to one year. Its instruments are close substitutes for money and can be turned into cash quickly with little loss.
Capital market
The market for long-term capital needed by business. It deals in equity and debt with long or indefinite maturity, and includes stock exchanges. It helps mobilise savings and form capital.
Primary market (new issues market)
The market where a company sells new securities to investors for the first time to raise fresh capital, through an IPO, FPO, rights issue or private placement.
Secondary market
Also called the stock market or stock exchange. Securities that were already issued are bought and sold between investors, so there is no fresh issue and the company does not receive the money.
Commercial paper and certificate of deposit
Both are unsecured money market instruments issued at a discount. CP is issued by highly rated companies (minimum Rs 5 lakh); CD is issued by banks and financial institutions (minimum Rs 1 lakh).
Repo and reverse repo
In a repo the seller of a security agrees to buy it back later at a higher price. Repo rate is what banks pay to borrow from RBI; reverse repo rate is what RBI pays to borrow from banks.

Quick revision: important points

Practice MCQs with answers

  1. A financial market mainly acts as which of the following?

    1. A regulator of banks
    2. An intermediary between investors and borrowers
    3. A producer of consumer goods
    4. A collector of income tax
    Show answer

    Answer: B. An intermediary between investors and borrowers
    It collects savings from those with surplus funds and channels them to those who need funds, so it works as an intermediary.

  2. Which of these describes a derivative?

    1. A share that pays a fixed dividend
    2. A bond that is repaid at par
    3. An instrument whose value comes from an underlying asset
    4. A receipt for money deposited in a bank
    Show answer

    Answer: C. An instrument whose value comes from an underlying asset
    A derivative derives its value from an underlying asset such as shares, bonds, currencies or commodities.

  3. Long-term finance is raised through the ______ and short-term finance through the ______.

    1. capital market; money market
    2. money market; capital market
    3. primary market; call market
    4. secondary market; primary market
    Show answer

    Answer: A. capital market; money market
    The capital market deals in long-term funds while the money market deals in short-term funds.

  4. How are the prices of instruments traded in a financial market determined?

    1. The Government fixes them every day
    2. The RBI Governor alone decides them
    3. The directors of the company decide them
    4. The forces of demand and supply
    Show answer

    Answer: D. The forces of demand and supply
    Investors supply funds and corporates use them; their interaction with demand and supply sets the prices.

  5. The liquidity function of a financial market means that investors can:

    1. Earn only a fixed rate of interest
    2. Sell their instruments and convert them into cash when they wish
    3. Never sell what they have bought
    4. Borrow without repaying
    Show answer

    Answer: B. Sell their instruments and convert them into cash when they wish
    Liquidity is the ability to sell financial instruments at any time and get cash, which suits investors who do not want to stay invested for long.

All Class 12 Secretarial Practice chapters

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