Financial Market

Justify the following statements

1. Financial markets acts as link between investor and borrower.
Reasons: Financial markets are the market, which act as an intermediary and makes possible the transfer of
funds from the investors to Borrowers. It acts as link between investor and borrower explain as follows
1. Mobilizing Funds: Financial Market collect the savings from individuals and institutions. It encourages the
investors to invest their savings according to their choices and risk management. It facilitates the transfer
of saving from savers to investors. Financial market offers different investment avenues to savers help to
channelize their savings into most productive use.
2. Capital Formation: Normally, People invest their savings into bank deposits, gold, real estate, mutual fund
and corporate securities. The bank deposits, mutual fund and corporate securities provide finance
indirectly or directly to business sector for satisfying their capital requirement; it is known as Capital
Formation. Financial Market provides a channel through which savings flow to industrial and commercial
organizations in the form of capital.
3. Transfer Resources: Financial Market act as an intermediary between lenders and borrowers funds. It
makes possible the transfer of money from the investors to the entrepreneurial borrowers. It facilitates the
transfer of real economic resources from lenders to ultimate users.
4. Productive Uses: It allows productive use of funds. In the hands of the investors their excess funds would
have remained idle. Borrowers use these funds for productive purposes. Business sector use finance for
satisfying their fixed capital and working requirements. These funds also used for development of
entrepreneurship.
5. Price Determination: Price of any product is determined by the forces of demand and supply.
Savers/lenders represent the supply of funds and the Borrowers (business firms) represent the demand.
The interaction between savers (investors) and business firms facilitates the price determination for the
financial assets, which is being traded in a particular market.

Conclusion: From the above points it is clear that Financial Market collects savings from investors and provides
finance to borrowers; so it acts as link between them.
2. Money market makes available short term finance through different instruments.
Reasons: Money market refers to the market where money and highly liquid marketable securities are bought
and sold having a maturity period of one less than one year. In the money market available various types
instruments as follows.

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1) Call Money and Notice Money: Call Money, Notice Money and Term Money Market are an important
segment of the money market in India. Call Money is the borrowing or lending of funds for 1day. If money
is borrowed or lend for period between 2 days and 14 days it is known as Notice Money. Term Money
refers to borrowing/lending of funds for period between 15 days and one year. Funds have to be repaid
within a specified time on the receipt of notice given by lender. When one bank faces temporary shortage
of cash, then another bank with surplus cash lends money to it. Hence Call/Notice money market is also
known as Call Money market. Call money is a method by which banks borrow mutually to maintain CRR
(Cash Reserve Ratio); CRR is the minimum balance a commercial bank should maintain with RBI. Call money
loan also available to stock brokers, jobbers and primary dealers.
2) Treasury Bills: Treasury Bills are short term securities issued by Reserve Bank of India on behalf of the
Central Government of India to meet the government’s short term funds requirement. Treasury Bills have
three maturity periods – 91 days, 182 days and 364 days. These are sold to banks, individuals, firms,
institutions etc. Treasury bills are available for a minimum amount of 25000 and in multiple thereof. It
does not carry interest. Treasury bills are also known as ‘Zero Coupon Bonds’ since they do not pay any
interest but the issue price is less than their face value and repaid at par. This difference is the interest
receivable on them. The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills.
RBI also issue Treasury Notes (1 to 10 years) and Treasury Bonds (more than 10 years).
3) Trade Bills / Commercial Bills: Normally the traders buy goods credit. The sellers get payment after the end
of the credit period. But if any seller does not want to wait or in immediate need of money he/she can
draw a bill of exchange in favour of the buyer. When buyer accepts the bill it becomes a negotiable
instrument and is termed as bill of exchange or trade bill. These have short-term maturity period generally
of 30 days, 60 days or 90 days and can be easily transferred to another. This trade bill can now be
discounted with a bank before its maturity. On maturity the bank gets the payment from the drawee i.e.,
the buyer of goods. When trade bills are accepted by Commercial Banks it is known as Commercial Bills, So
trade bill is as instrument, which enables the drawer of the bill to get funds for short period to meet the
working capital needs.
4) Commercial Papers: Commercial Paper is debt instrument issued by the corporate houses for raising short
term finance. It is an unsecured promissory note issued by highly rated companies, All India Financial
Institutions (i.e. SIDBI, IFCI, EXIM Bank, etc.) and Primary Dealers with a fixed maturity period which varies
from 7 days to maximum 1 year. As the instrument is not backed by collateral, only large firms with
considerable financial strength are authorized to issue the instrument. It has a maturity period of 15 days
to one year. It is sold at a discount and redeemed at par. Interest rate on commercial paper usually is lower
than the market rate. CP is available for a minimum amount of 5 lakhs or multiples thereof. CP is as an
important source of working capital and for bridge financing (to meet flotation cost, brokerage, advertising,
printing share applications etc.) for raising long term funds from capital market. Commercial banks and
mutual funds contribute towards this kind of instruments.
5) Other instruments: Money market also other instruments such as Certificate of Deposits, Repo rate
Government Securities, Money market mutual fund, Advances from Banks and Loans from unorganized
market.
Conclusion: Money Market provides market for borrowing and lending of short term funds. The maturity
period of these instruments can be one day, one week, one month or up to one year. They provide finance for

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 satisfying working capital requirement. Different instruments used by participants of money market and their
nature and requirement of business, but they all provide short term finance to the business sector.
3. There are many participants in money market.
Reasons: Money market refers to the market where money and highly liquid marketable securities are bought
and sold having a maturity period of one less than one year. Money market participants as follows
1. Reserve Bank of India: RBI plays a vital role in the money market. RBI acts as central bank of the India. It is
the monetary authority and is regarded as an apex institution. No money market can exist without the
central bank. The central bank is the lender of the last resort, intermediary, regulator, controller and
guardian of the money market. By the money market RBI regulates money supply and implements its
monetary policy. It issues government securities on behalf of the government and also underwrites them.
2. Central and State Government: Central Government is a borrower in the Money Market, by the issue of
Treasury Bills (T-Bills) and Government Securities. These instruments are issued to finance the government
as well as for managing the Government’s cash flow. T-bills are issued by the Reserve Bank of India. It
represents zero risk instruments. Due to its risk free nature banks, corporates, etc. buy the T-bills and
provide finance to government. The State Governments issue securities termed as State Development
Loans (SDLs), which are medium to long-term maturity bonds floated to enable State Governments to fund
their budget deficits.
3. Public Sector Undertaking (PSU): PSU are listed government companies. They can issue commercial papers
to finance the working capital requirements. Like any other business organization, PSUs generate large cash
surpluses. Such PSUs are active investors in instruments like Fixed Deposits, Certificates of Deposits,
Government Securities and Treasury Bills.
4. Scheduled Commercial Banks: The scheduled commercial banks are those banks which are included in the
second schedule of RBI Act 1934 and which carry out the normal business of banking such as accepting
deposits, giving out loans and other banking services. These are very big borrowers and lenders in the
money market. They deal in call money, notice money, commercial bills, commercial papers, certificate of
deposits, T-bills, Government Securities, etc. Commercial banks are the back bone of the money market.
They form one of the major constituents of the money market. These banks use their short term deposits
for financing trade and commerce for short periods.
5. Others: Insurance companies, Mutual fund companies, Non-Banking Finance Companies, Corporates and
Primary dealers.
Conclusion: A large number of borrowers and lenders make up the money market. Anyone can participate in
the market. But some segments of money market are available for particular participants such as all money
market is open to only banks. Financial Institutions, Insurance companies and Mutual funds can only lend in the
market.
4. Capital market is useful for corporate sector.
Reasons: Capital market is a market for long-term securities that includes both debt and equity. It is useful for
corporate sector, explain as follows
1. Long term Finance: It provides medium term and long term finance to the organizations for satisfying fixed
capital requirement of business. These securities provide up to 5 years, 10 years, 20 years, and 30 years or
even up to winding up of the business. Corporates, industrial organizations, financial institutions access
long term funds from both domestic and foreign market.

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 2. Marketable and Non-marketable Securities: Capital Market trades in both marketable and non-marketable
securities. Marketable securities are securities that can be transferred to another e.g. Equity Shares,
Preference Shares, Debentures, bonds etc. On the other hand, non-marketable securities are those which
cannot be transferred to another e.g. Term Deposits, long term loans and advances. These all securities
provide long term finance to corporate sector.
3. Mobilization of Savings: Capital market acts as a link between savers and entrepreneurial borrowers. It
transfers money from savers (households) to entrepreneurial borrowers (companies who need capital).
This way these markets mobilize savings in an economy and divert them into productive investment.
Productive usage of funds paves the way for economic growth and prosperity.
4. Capital Formation: Capital Formation is the net addition to the existing stock of an economy’s capital. It
includes the creation of capital goods like factories, machinery, tools, equipment and so on. These capital
goods are utilized for the production of other goods. Savings are mobilized through the capital market to
various sectors such as the agricultural sector, industrial sector, etc. in an optimal manner. The activities of
capital market determine the rate of capital formation in an economy. Capital market offers attractive
opportunities to those who have surplus funds so that they invest more and more in capital market and are
encouraged to save more for profitable opportunities.
Conclusion: From the above points it is clear that capital market collects savings from investors and provides
finance to corporate sector for long term basis for satisfying fixed capital requirement of the business, so it is
useful to corporate sector.

5. The gilt-edged market is also known as the government securities market.

Reasons: Government securities are instruments issued by the government to borrow money from the market.
This finance is used for public expenditure or providing facilities to the citizens of the nation. They are also known
as gilts or gilt edged securities, it explain as follows.
1. High Liquidity: Govt. securities are very liquid. This is because the Govt. securities are tradable in the stock m
market. This means, to get money, the holder can sell it in the stock market. High marketability and tradability
gives high liquidity for G- securities. For commercial banks, by pledging government securities with RBI, it can
avail a one day loan known as repo. Whenever a bank needs money it can approach the RBI to take loans by
pledging the G- securities.
2. High rate of interest: They have a reasonably high rate of interest. In India, the G-securities are allocated
among the buyers through auction method. This auction ensures competitive interest rate for government
securities. Given their zero risk default nature, the interest rate is very good for G- securities. These securities
are safe investment as payment of interest and repayment of principal amount are guaranteed by government.
3. No Speculation: Speculation means purchase or sale of a commodity with a view to earning profit from future
price changes. There is no speculation on government securities, because market prices of securities cannot be
changed due to any factor. The price of securities is always stable. So investors never bear loss for these
securities.
4. Major Institutions: The institutional based investors are majorly involved in the G-securities market. LIC, UTI,
Mutual Fund, Pension Fund, Commercial banks, Financial Institutions, Insurance companies, etc. invest money
in these securities. There is heavy volume of transactions in this market.
Conclusion: From the above points it clear that government securities enjoy high liquidity, high rate of interest,
guaranteed by government and no speculation, so it is considered gilt-edged securities.
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