1: Overview of Financial Systems

They affect everyday life and the flow of funds throughout the economy, affecting business profits, the production of goods and services, and even the economic well-being of countries.

True

<p>A developed and efficient financial system is highly beneficial for economic growth and development as it performs several crucial functions, such as mobilizing and allocating resources, reducing transaction costs, and facilitating risk management.</p> Signup and view all the answers

<p>Financial markets act as a link between savers and investors, facilitating the allocation of resources from those who have a surplus of funds to those who need them.</p> Signup and view all the answers

<p>To ensure the stability of government currencies</p> Signup and view all the answers

<p>The primary market is where new securities are first issued to investors, while the secondary market is where existing securities are traded among investors.</p> Signup and view all the answers

<p>Facilitate the transfer of risk, create a wealth effect, and enhance liquidity</p> Signup and view all the answers

<p>They are responsible for making sure that the elements of the financial system operate in a safe and reliable manner.</p> Signup and view all the answers

<p>Central banks monitor and stabilize the economy.</p> Signup and view all the answers

<p>The increase in liquid financial assets as a percentage of GDP</p> Signup and view all the answers

<p>The increase in the number of individuals and households participating in the financial system</p> Signup and view all the answers

<p>True</p> Signup and view all the answers

<p>In direct finance, borrowers borrow funds directly from lenders in the financial markets, while in indirect finance, financial intermediaries, such as banks, intervene in the process.</p> Signup and view all the answers

<p>Financial markets are defined by the maturity of the securities traded: money markets for short-term instruments and capital markets for long-term instruments.</p> Signup and view all the answers

<p>To provide a balancing mechanism to even out the demand for and supply of short-term funds.</p> Signup and view all the answers

<p>To facilitate economic growth through the issue of primary and secondary securities and the transaction of outstanding securities, which facilitates liquidity.</p> Signup and view all the answers

<p>High risk</p> Signup and view all the answers

<p>Typically issued at a premium to their face value</p> Signup and view all the answers

<p>Treasury Bills</p> Signup and view all the answers

<p>False</p> Signup and view all the answers

<p>Investment banks help corporations issue securities by underwriting them, guaranteeing a price, and selling them to the public.</p> Signup and view all the answers

<p>Financial instruments serve as a means of payment, a store of value, and a mechanism for transferring risk.</p> Signup and view all the answers

<p>Key characteristics of financial instruments include liquidity, transaction costs, risk of default, maturity, tax status, volatility, and rate of return.</p> Signup and view all the answers

<p>True</p> Signup and view all the answers

<p>Treasury Bills are highly liquid, negotiable, offer a risk-free investment, provide a reasonable yield, and are eligible for inclusion in securities for SLR.</p> Signup and view all the answers

<p>Banks, financial institutions, corporate bodies, mutual funds, foreign institutional investors, state governments, provident funds, primary dealers, and foreign banks</p> Signup and view all the answers

<p>False</p> Signup and view all the answers

<p>Dutch auction</p> Signup and view all the answers

<p>True</p> Signup and view all the answers

<p>Cash management bills are short-term instruments, similar to T-bills, but issued for maturities less than 91 days.</p> Signup and view all the answers

<p>The call money market is a market for very short-term funds, typically repayable on demand with a maturity period varying between one day to 14 days.</p> Signup and view all the answers

<p>Call money is unsecured, highly risky, and volatile.</p> Signup and view all the answers

<p>Scheduled commercial banks, cooperative banks, and primary dealers are allowed to both lend and borrow in the call money market.</p> Signup and view all the answers

<p>Primary dealers are authorized to purchase government securities directly from the central bank and resell them in the securities market.</p> Signup and view all the answers

<p>CBLOs provide liquidity to entities that are restricted from accessing the call money market due to certain restrictions.</p> Signup and view all the answers

<p>Nationalized banks, private banks, foreign banks, cooperative banks, financial institutions, insurance companies, mutual funds, primary dealers, and bank cum primary dealers</p> Signup and view all the answers

<p>Commercial papers are unsecured, negotiable, and transferable promissory notes with a fixed maturity period, typically issued by creditworthy companies and financial institutions.</p> Signup and view all the answers

<p>False</p> Signup and view all the answers

<p>A commercial bill is a short-term, negotiable, self-liquidating instrument used to finance trade transactions.</p> Signup and view all the answers

<p>Commercial bills are either demand bills, payable on demand, or usance bills, payable at a future date.</p> Signup and view all the answers

<p>A certificate of deposit is a debt instrument issued by a bank to depositors that pays annual interest and at maturity pays back the original purchase price.</p> Signup and view all the answers

<p>False</p> Signup and view all the answers

<p>Banks often issue certificates of deposit during periods of tight liquidity when deposit rates are low, but credit rates are high.</p> Signup and view all the answers

<p>True</p> Signup and view all the answers

<p>Mortgages are loans to households or firms to purchase housing, land, or other real structures.</p> Signup and view all the answers

<p>Mortgage-backed securities bundle individual mortgages, whose interest and principal payments are collectively paid to the holder of the security.</p> Signup and view all the answers

<p>Corporate bonds are long-term debt instruments issued by corporations to raise capital.</p> Signup and view all the answers

<p>A government security acknowledges the government's debt obligation and is a tradable instrument issued by the central or state government.</p> Signup and view all the answers

<p>False</p> Signup and view all the answers

<p>Treasury bills are short-term debt instruments issued by the central bank to finance short-term financial requirements, while government bonds are long-term debt instruments issued by the central or state government to finance long-term projects and initiatives.</p> Signup and view all the answers

<p>Government bonds can be either fixed rate bonds, with a coupon rate that remains constant throughout the life of the bond, or floating rate bonds, where the coupon rate is adjusted at regular intervals during the life of the bond.</p> Signup and view all the answers

<p>Zero coupon bonds are bonds with no coupon payments, issued at a discount to their face value and redeemed at par upon maturity.</p> Signup and view all the answers

<p>Capital indexed bonds protect investors by linking the principal amount to an accepted index of inflation, safeguarding investors against inflation-related losses.</p> Signup and view all the answers

<p>Inflation indexed bonds can be linked to either the Wholesale Price Index or the Consumer Price Index, offering investors various choices based on their investment goals and risk appetite.</p> Signup and view all the answers

<p>Bonds with call and put options provide either the issuer or the investor with the right to buy back or sell the bond at a predetermined price during the currency of the bond.</p> Signup and view all the answers

<p>Special securities are issued by the government to entities like oil marketing companies, fertilizer companies, and the food corporation of India as compensation for subsidies or other specific needs.</p> Signup and view all the answers

<p>These securities were issued by the government to specific public sector banks in 2018 to provide financial support and are not eligible for investment in pursuance of statutory provisions.</p> Signup and view all the answers

<p>STRIPS are created by separating the cash flows associated with a regular government security into separate securities, representing future interest and principal payments.</p> Signup and view all the answers

<p>Sovereign gold bonds are unique securities issued by the government, linked to the price of gold, and are budgeted in lieu of market borrowing.</p> Signup and view all the answers

<p>False</p> Signup and view all the answers

<p>These bonds are long-term debt instruments issued by state and local governments to finance infrastructure projects, such as schools, roads, and other public works.</p> Signup and view all the answers

<p>True</p> Signup and view all the answers

<p>State Development Loans (SDLs) are the market in India where bonds issued by state governments are raised.</p> Signup and view all the answers