S.
15 Mark Questions
No.
1. A company uses a financial instrument for
bridge financing. The instrument here is
short term, low risk, unsecured and highly
liquid. It needed to buy machinery for
which it issued equity. This turned out to be
expensive as this issue involved floatation
costs. The company is large and has good
creditworthy and this method has come up
as a great help to it.
Based on the above case study, answer the
following:
a) Which financial instrument is
indicated in the above case?
b) Which type of instrument is this?
c) Name the types of floatation costs
which are generally involved?
d) How has this method helped the
company?
e) Name 2 money market instruments
which are issued at discount and
redeemed at par.
2. Ramesh buys a financial asset from the
RBI. This financial asset is an instrument of
short term borrowing. He has bought it
because he doesn’t want to take risk and
wants an assured return. This instrument is
a promissory note. It is highly liquid. The
instrument is also known as zero coupon
bonds. On this instrument it is written T-91
Based on the above case study, answer the
following:
a) Which financial asset is indicated
in the above case?
b) On whose behalf does the RBI
issue this instrument?
c) Why is this instrument called as
the zero coupon bond?
d) What does T-91 denote here?
e) What is the minimum amount for
which this instrument is available?
Answer Key
1) The financial instrument indicated in the above case
is a commercial paper.
2) This is a money market instrument.
3) The types of floatation costs involved here are:
a. Brokerage
b. Publishing cost
c. Advertising costs.
d. Underwriter’s commission.
4) This method has helped the company by providing
short-term funds for its seasonal and working capital
needs.
5) The two money market instruments which are issued
at discount and redeemed at par are:
a. Treasury bull.
b. Commercial paper.
1) The financial asset which is indicated in the above
case is “Treasury Bill”.
2) The RBI issues this instrument on the behalf of the
government of India.
3) The instrument is called as Zero Coupon Bond
because the interest rate given by the bank is not
given openly. The interest in fact comes in the form
of discount which is given on the face value. The
instrument is redeemed at par (on the written face
value) so the instruments is issued at discount.
4) T-91 here denotes the maturity period of the
Treasury bill which is here 91 days.
5) The minimum amount for which T-Bill are available
is Rs.25,000. For a higher value it is given in the
multiples of Rs25,000.
3. Ramesh the CEO of a company thinks of 1) The various methods of floatation highlighted in the
going with the most popular method of above case are:
raising funds used by the public companies. a. Offer through prospectus. Ramesh the CEO
He discussed this option with his immediate
of a company thinks of going with the most
subordinates. After discussion he realises
that since his company is private company popular method of raising funds used by the
he should think of some other option. Then public companies.
they think of issuing the securities through b. Offer for sale. Then they think of issuing the
intermediaries like issuing houses or stocks securities through intermediaries like
brokers. When his nephew comes to know issuing houses or stock brokers.
about this he decides to suggest this uncle c. Private placement: he advises him to
another way. He advises him to involve
involve institutional investors which will
institutional investors which will help him
raise funds more quickly and reduce many help raise funds more quickly and many
mandatory and non-mandatory expenses. mandatory and non-mandatory expenses
After a lot of discussion the option could be avoided.
suggested by his nephew is chosen as final. 2) The method which will be applicable in the primary
Based on the above case study, answer the market will be offer through prospectus
following: 3) The type of capital market in which trading of only
a) In the above case identify the
existing share is done is secondary market (stock
various methods of floatation
exchange)
highlighted.
4) Primary markets
b) Which method do you think will
5) Primary markets.
be applicable in the primary
market?
c) In which type of capital market
trading of only existing shares is
done?
d) In which type of capital market
only buying of securities is
possible as securities can’t be sold
here?
e) Which type of capital market
doesn’t have fixed geographical
location?