Financial Markets & Services - Unit II
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Questions and Answers

What is the minimum investment amount for a 364-day Treasury bill?

  • Rs. 100000
  • Rs. 25000 (correct)
  • Rs. 50000
  • Rs. 10000

    • When were 364-day Treasury bills introduced in India?

  • April 1992 (correct)
  • July 1995
  • January 1990
  • October 1997

    • How often are 364-day Treasury bills auctioned?

  • Daily
  • Weekly
  • Monthly
  • Every alternate week (correct)

    • What is the maturity period of a Commercial Paper?

    <p>Short-term, fixed period (A)</p> Signup and view all the answers

    Who suggested the introduction of Commercial Paper in India?

    <p>Working Group on Money Market (A)</p> Signup and view all the answers

    When was Commercial Paper introduced in India?

    <p>January 1990 (A)</p> Signup and view all the answers

    What type of promissory note is Commercial Paper?

    <p>Unsecured (C)</p> Signup and view all the answers

    Who typically issues Commercial Paper?

    <p>Creditworthy corporates (B)</p> Signup and view all the answers

    What is the primary reason for corporates to issue Commercial Paper?

    <p>Working capital requirements (C)</p> Signup and view all the answers

    Which of the following entities is NOT typically considered a major participant in the money market?

    <p>Individual investors (B)</p> Signup and view all the answers

    What is the primary function of the money market?

    <p>To provide a market for short-term debt instruments (D)</p> Signup and view all the answers

    What is the typical maturity period of instruments traded in the money market?

    <p>Less than 1 year (B)</p> Signup and view all the answers

    How does a well-developed money market contribute to the overall economy?

    <p>It helps to stabilize interest rates and prevent wide seasonal fluctuations (B)</p> Signup and view all the answers

    What is the issue with the stamp duty in relation to commercial bills?

    <p>The availability of stamp papers with relevant denominations is limited. (C)</p> Signup and view all the answers

    What is a key difference in the attitude of banks towards commercial bills compared to developed countries?

    <p>Banks in India are reluctant to rediscount bills. (C)</p> Signup and view all the answers

    What is a key benefit of a well-functioning money market for financial institutions?

    <p>It provides profitable investment opportunities for short-term surplus funds (B)</p> Signup and view all the answers

    What is the primary reason for the absence of a strong bill culture in India?

    <p>The preference for overdraft and cash credit facilities over bill financing. (D)</p> Signup and view all the answers

    Which of the following is NOT a typical instrument traded in the money market?

    <p>Corporate bonds (B)</p> Signup and view all the answers

    What is the significance of the 'call money market' in relation to commercial bills?

    <p>It provides short-term financing for the acquisition of commercial bills. (A)</p> Signup and view all the answers

    How does the money market contribute to the overall liquidity available in the economy?

    <p>By providing a market for short-term lending and borrowing, facilitating the flow of funds (C)</p> Signup and view all the answers

    What makes the verification of genuine trade bills difficult?

    <p>The need to scrutinize invoices and investigate the validity of the underlying trade. (B)</p> Signup and view all the answers

    Which of the following is NOT a benefit of a Certificate of Deposit (CD)?

    <p>High Liquidity (B)</p> Signup and view all the answers

    What is the minimum amount of net worth required for a company to issue commercial paper according to RBI guidelines?

    <p>Rs. 4 crores (C)</p> Signup and view all the answers

    What is a key characteristic of a commercial bill?

    <p>Short-term, self-liquidating instrument (C)</p> Signup and view all the answers

    Why do investors choose CDs over traditional savings accounts?

    <p>Higher interest rates (B)</p> Signup and view all the answers

    According to RBI guidelines, what is the minimum maturity period for commercial paper?

    <p>7 days (A)</p> Signup and view all the answers

    What is meant by the term 'self-liquidating' in relation to a commercial bill?

    <p>The bill automatically converts into cash at maturity. (A)</p> Signup and view all the answers

    What is the minimum investment amount required from a single investor for commercial paper?

    <p>Rs. 5 lakhs (D)</p> Signup and view all the answers

    Which of the following entities is responsible for credit rating of companies issuing commercial paper?

    <p>SEBI registered credit rating agencies (D)</p> Signup and view all the answers

    What is the main advantage of a CD in terms of market volatility?

    <p>Guaranteed return on investment (D)</p> Signup and view all the answers

    Which of these aspects is NOT directly mentioned as an advantage of a CD?

    <p>Tax-free returns (A)</p> Signup and view all the answers

    What is the maximum maturity period allowed for commercial paper?

    <p>1 year (A)</p> Signup and view all the answers

    What type of instrument is a commercial bill?

    <p>Short-term debt instrument (D)</p> Signup and view all the answers

    Why is commercial paper considered a simple financing option?

    <p>It involves minimal paperwork and straightforward transactions. (C)</p> Signup and view all the answers

    Which of the following is NOT a reason why commercial paper can be considered advantageous?

    <p>It guarantees a fixed rate of return for investors. (D)</p> Signup and view all the answers

    What is the most common reason investors choose a CD?

    <p>High-interest rates (D)</p> Signup and view all the answers

    How does commercial paper typically benefit companies looking to raise long-term capital?

    <p>Increases their credibility in the financial market, enhancing their future borrowing capabilities. (C)</p> Signup and view all the answers

    What does the statement 'a commercial bill enhances the liability to make payments on a fixed date when goods are bought on credit' mean?

    <p>It guarantees the seller will receive payment on time. (C)</p> Signup and view all the answers

    Which of the following best describes the role of a commercial bill in finance?

    <p>A way for companies to manage short-term financing needs. (E)</p> Signup and view all the answers

    What is the role of an Independent Payment Agent (IPA) in the issuance of commercial paper?

    <p>To facilitate the payment of proceeds to investors. (A)</p> Signup and view all the answers

    What is the main reason why commercial paper is considered a high-return investment option?

    <p>It offers higher returns compared to traditional banking instruments. (D)</p> Signup and view all the answers

    Signup and view all the answers

    Study Notes

    Financial Markets & Services - Unit II

    • Money Market is a market for financial assets similar to cash.
    • It offers short-term funds (overnight to less than one year).
    • Major participants: Commercial banks, other financial intermediaries, large corporations, and the Reserve Bank of India (RBI).

    Functions of Money Market

    • Enhances the profit of financial institutions by providing profitable investment opportunities for short-term funds.
    • Improves liquidity for the entire country.
    • Prevents wide seasonal fluctuations in interest rates.
    • Facilitates transfer of funds across regions.
    • Increases the supply of funds with various credit instruments.

    Objectives of Money Market

    • Provides short-term funds to borrowers at reasonable rates.
    • Converts savings and idle funds into effective investments.
    • Allows the RBI to regulate the level of liquidity.
    • Facilitates short-term funding needs for companies and corporations.
    • Assists the government in implementing monetary policies.

    Instruments of Money Market - Treasury Bills

    • Short-term instruments issued by the Government of India.
    • Used to manage short-term liquidity shortages.
    • Used to bridge seasonal/temporary revenue and expenditure gaps.
    • First issued in India in 1917.
    • Negotiable securities
    • High liquidity and no default risk.
    • Currently available in 14-day, 91-day, 182-day, and 364-day tenures.
    • Auctioned by the RBI every alternate Wednesday.
    • Available in multiples of Rs. 25,000.
    • Zero coupon securities; issued at a discount and redeemed at face value at maturity.

    Instruments of Money Market - Commercial Paper

    • Unsecured short-term promissory notes.
    • Introduced in India in January 1990.
    • Negotiable and transferable by endorsement and delivery with a fixed maturity period.
    • Issued at a discount by creditworthy and highly rated corporates.
    • Issued in large denominations (e.g., Rs. 5 lakh in India or $100,000 in the U.S.).
    • Minimum maturity of 7 days and a maximum of 1 year.

    Participants of Money Market - Commercial Paper

    • Highly rated corporate borrowers and private sector companies.
    • Primary Dealers
    • NBFCs (Non-Banking Financial Companies)
    • Minimum tangible net worth of Rs. 4 crores.
    • Minimum current ratio of 1.33:1 (as per RBI guidelines).
    • Listed on a stock exchange.
    • Credit rating from a SEBI-registered credit rating agency
    • Minimum investment amount Rs. 5 Lakhs.

    Certificate of Deposit (CDs)

    • Short-term deposit instruments issued by banks and financial institutions.
    • Issued in the form of usance promissory notes.
    • Negotiable and transferable.
    • India introduced CDs in 1989.
    • Available in India for a minimum of ₹1 lakh and subsequent multiples of it.
    • Issued by Scheduled Commercial Banks (SCBs) and All-India Financial Institutions.
    • Cooperative Banks and Regional Rural Banks (RRBs) cannot issue CDs.
    • Term period between 7 days and 3 years for SCBs.

    Advantages of Commercial Paper

    • Simple process with minimal documentation.
    • Flexible maturities to match cash flow needs.
    • Easier to raise long-term capital.
    • Higher returns compared to banking system.

    Advantages of Certificates of Deposit (CDs)

    • Secure investment.
    • Predictable growth.
    • No risk of loss from market volatility.
    • High-interest rates.
    • Low maintenance costs.

    Advantages of Call Money Market

    • High liquidity.
    • High profitability when call rates are volatile.
    • Facilitates meeting of SLR (Statutory Liquidity Ratio) requirements.
    • Safe transactions due to strong financial standing of participants.
    • Assists central bank open market operations efficiently.

    Disadvantages of Indian Money Market

    • Existence of unorganized segment (indigenous bankers).
    • Lack of integration of different segments.
    • Disparity in interest rates.
    • Seasonal diversity creating fluctuations in interest rates.
    • Lack of proper bill market.
    • Limited instruments and secondary markets.
    • Limited participation.
    • Uneven development geographically (e.g., confined to industrial centers).
    • Call money rate volatility (ranging from 12% to 85%).

    Commercial Bill

    • Short-term, negotiable, and self-liquidating instrument.
    • Used to finance credit purchases.
    • Liquidity: convertible into cash readily.
    • Certainty of payment.
    • Simple legal remedy for dishonor.
    • Ideal for short-term investment.
    • High and quick yield.

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    FMS Unit 2 PDF - Financial Markets & Services

    Description

    Explore Unit II of Financial Markets and Services focusing on the money market. This quiz covers the functions, objectives, and participants in the money market, emphasizing its impact on liquidity and short-term funding. Test your understanding of how the money market operates and its significance in the financial system.

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