Short Answers

1. Distinguish between a Physical asset and a financial asset?

Physical assets are not useful for further production of goods or for earning income. They are useful
for consumption only. Eg. Land, buildings, gold or silver.

A financial asset is one which is used for the production or consumption for further creation of
assets. Eg. Equity shares, debentures earn income in future.

2. Classify Financial assets giving examples

Financial assets are classified as Marketable assets and non-Marketable assets.

Marketable assets are those which can be easily transferred from one person to another without
much hindrance. Eg. Shares of limited companies, Government securities, Mutual fund units, UTI
units etc.

Non-marketable assets cannot be transferred easily. Eg. Bank deposits, Provident funds, Pension
funds, National Savings Certificates, Insurance policies etc.

3. What is a money market?

Money market is a market for dealing with financial assets and securities which have a maturity
period of up to one year. It is a market for purely short-term funds. The money market may be sub-
divided into four as:
a. Call money market
b. Commercial bills market
c. Treasury bills market
d. Short term loan market.

4. What is a capital market?

Capital markets are market for financial assets which have a long or indefinite maturity and deals
with long term securities which have a maturity period of above one year. Capital market is further
divided into three namely:

1. Industrial securities market

2. Government securities market
3. Long term loans market

5. Distinguish between a primary market and a secondary market?

Primary market is a market for new issues and new financial claims and deals with those securities
which are issued to the public for the first time.
Secondary market is a market for secondary sale of securities and deals with those securities which
are already passed through the new issue market.
6. What is performance guarantee?

Performance guarantee acts as a security cover from the creditors point of view. Eg. payment of
earnest money, retention money, advance payments, etc.

7. State the functions of a foreign exchange market?

Most important functions of foreign exchange market are:

1. To make necessary arrangements to transfer purchasing power from one country to
another.
2. To provide adequate credit facilities for the promotion of foreign trade.
3. To cover foreign exchange risks by providing hedging facilities.

In India, the foreign exchange business has three-tiered structure consisting of:

1. Trading between banks and their commercial customers.

2. Trading between banks through authorized brokers.
3. Trading with banks abroad.

8. What do you mean by indirect securities? Give an example

Indirect securities are securities issued by financial intermediaries to the ultimate savers. Eg. Unit
Trust of India and Mutual funds issue securities in the forms of units to public and the money pooled
is invested in companies.

9. What is venture capital financing?

Venture capital financing is another method of financing in the form of equity participation. A
Venture capitalist finances project based on the potentialities of a new innovative project and much
thrust is given to new ideas or innovations.

10. What is STRIPS?

STRIPS is separate trading and registered interest and principal of securities. It is nothing but the
process of separating a standard coupon leaving bond into its constituent interest and principal
components. For example, striping of 15-year security would yield 30 Coupon securities (2 payments
in a year Jan 2 and July 2). All the 30 coupon securities and the principal security would therefore
become zero coupon bonds.

11. What is a Capital Market? What are its major constituents?

Capital market is a market for financial assets which have a long or indefinite maturity and deals with
long term securities with a maturity period of above one year. Three major constituents of capital
market are:
1. Industrial securities market.
2. Government Securities market, and
3. Long-term loans market.
 1. Industrial Securities Market: Deals with equity shares or ordinary shares, preference shares
and debenture or bonds. It is further divided into Primary market and secondary market.
Primary market deals with new issues and secondary market deals with secondary sales of
industrial securities.
2. Government Securities Market: This is also called as Gilt-edged securities market where
government securities are traded. The long-term government securities are traded in this
market. The securities are stock certificates, promissory notes, bearer bonds which are
discounted.
3. Long-term loans market: Development banks and commercial banks play a significant role in
the market by supplying long-term loans to corporate customers. Long term market may
further be classified as term loans market, mortgages market and financial guarantees
market.

Term loan markets in India are dominated by development banks like IRBI, IFCI and other
state financial corporations. These institutions help to meet the growing and varied long-
term financial requirements of industries and also help in identifying investment
opportunities and support modernization efforts.

Mortgages market refer to those which supply mortgage loan mainly to individual
customers. They deal with loans against security of immovable property like real estate. The
mortgage market may have primary market as well as secondary market. The primary
market deals with original extension of credits while the secondary market deals with
resales of existing mortgages.

Financial guarantees market is where finance is provided against the guarantee of a reputed
person in the financial circle. It is a contract to discharge the liability of a third party in case
of his default. The common forms of guarantees are performance guarantee and financial
guarantee. Performance guarantee provides the security cover by earnest money, retention
money and advance payments etc. while financial guarantee cover financial contracts.

12. Write a brief note on the financial guarantees market operating in India?

13. What are the financial instruments? What are their characteristic features?

14. What legislative measures have been taken by the Government to support the Indian financial
system?

15. Classify financial assets and bring out their features?

16. Distinguish between stripping and reconstitution?

17. Classify the various financial intermediaries functioning in the Indian financial system and bring
out their features.

18. Show the classification of Indian financial markets in the form of a chart and explain the features
of each market?
19. What do you mean by financial rate of return? What are the objectives of the interest rate policy
of the government and what steps have been taken by the Government in this direction?

20. Trace out the development of the financial system in India

21. In spite of suitable legislative measures, the Indian financial system remains week. Comment

22. Discuss the role of the financial system in the economic development of the country?