Get AHSEC Class 12 Finance Chapter: 6 MONEY MARKET Important Questions Answers 2025.
In this Post we have provided Unit II: Money Market and Foreign Exchange Market HS 2nd Year Finance Chapter: 6 MONEY MARKET Important Notes with Marked/highlighted previous year questions asked in AHSEC Examination.
AHSEC Class 12 Finance Notes
Chapter: 6 MONEY MARKET
Unit II: Money Market and Foreign Exchange Market
CHAPTER-6
MONEY MARKET
1. What is financial market? What are its components? Mention its functions.
Ans: Financial market is a market for the creation and exchange of financial assets such as shares, debentures, bonds and government securities. It is a network of institutions which provide short, medium and long term funds, Financial markets make possible the transfer of money from the investors to the entrepreneurial borrowers. Actually they bring together the lenders of funds and borrowers of funds.
Types of Financial Markets (sub-markets) Financial markets are divided into two categories:
a) Money market – Market for short term funds.
b) Capital market – Market for long term funds.
Role and Functions of financial market
(a) Mobilize savings and channelize them into most productive purposes – It offers the investors different investment avenues and helps to channelize surplus funds into productive use.
(b) Price discovery Price of any product is determined by the forces of demand and supply. The interaction between savers(investors) and business firms facilitates the price determination for the financial assets, which is being traded in a particular market. converted
(c) Providing liquidity – Financial markets provide liquidity to financial assets as they can be into cash by selling them in the market very easily.
(d) Reducing cost of transaction – Financial markets provide a common platform where buyers and sellers meet and to trade their securities without much cost and time.
2. What is money market? Explain its nature/feature and functions.
Ans: Money market is the market for short term funds. Short term funds are meant for a period of up to one year. Money market is not usually located at a particular place. It is a term used to describe all organizations and institutions that deal in short term debt instruments. It also deals in treasury bills (TBS), Commercial bills, Commercial paper (CP), ADRs, GDRs, Call and Short money market etc.
According to Crowther, “Money market is a collective name given to the various firms and institutions that deal with the various grades of near-money”.
The RBI defines the money market as “The centre for dealing, mainly of a short-term character, in monetary assets; it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders”.
Features of Money Market
The salient features of money market are as follows:
(a) Flow of short-term funds: The money market brings together the lenders who have surplus funds for short-term i.e one day to one year and the borrowers who are in need of short-term funds.
(b) No fixed geographical location: There is no physical location, all activities are conducted over telephone or internet. , non-
(c) Participants: The major participants of money market consist of the RBI, Commercial banks banking finance companies, State governments, large corporate houses and mutual funds.
(d) Instruments: Short term debt instruments are traded here such as treasury bills (TBs), Commercial bills, Commercial paper (CP), ADRs, GDRs, Call and Short money market etc.
(e) Sub-markets or components: Money market consists of many sub-markets such as call money market, collateral loan market, acceptance market, bill market, treasury bills market etc.
(f) Safety: Short term duration ensures grater safety.
(g) Investment outlay :Huge sums of money is being transacted in this market.
(h) Unsecured-Instruments traded here are unsecured.
The major functions of money market are given below:
(a) Economic Development: The money market helps in economic development of a country by providing short term funds to both public and private institutions without any discrimination.
(b) Funds for government: Money market helps the government in borrowing short term funds at very low interest rate. This can be done by issuing treasury bills.
(c) Return on idle funds: Money market helps the lenders to earn return on their idle or surplus funds for short period.
(d) Implementation of Monetary Policy: Money market helps in implementing monetary policy of the
(e) Mobilisation of funds: The money market helps in transferring funds from one sector to another. The central bank of any country. development of trade, commerce and industry depends on the mobilisation of financial resources.
(f) Connecting link between various financial market: Money market acts as a connecting link between all the segments of financial market like capital market, foreign exchange market etc.
3. Explain the various Money market instruments. [AHSEC 2024]
Ans: Money market is the short term security market. Following are the instruments dealt in money market.
i. Treasury bills: T-bills short term government security ranging from 14 days to 364 days issued by RBI on behalf of the government to meet its short-term financial needs. No fixed interest in payable on Treasury bills. Normally TBS are issued at the lowest interest rate agreed on competitive bidding. These bills are negotiable instruments and freely transferable.
ii. Commercial Paper: Commercial papers are unsecured promissory notes issued by highly creditworthy companies to raise funds for short term. It usually has a maturity period of 15 days to one year. CPs are normally issued at a discount and redeemed at par.
iii. Call money and short notice money: Call money refers to money given for a very short period ranging from 1 day to 7 days. Surplus funds of the commercial banks and other institutions are usually given as call money. Banks are the borrowers as well as lenders for the call funds. Money at short notice can be of maximum 14 days.
iv. Certificate of deposit (CD): Certificate of deposit is an unsecured, negotiable, short term instrument in bearer form, issued by commercial banks and financial institutions to individuals, corporations and companies. It has a maturity period from 91 days to 12 months. It is a bearer certificate which is freely transferable and can be sold in secondary market. Banks are not allowed to discount these documents.
V. Commercial bills: These are the trade bills which are drawn at the time of credit sales by the Drawer (Supplier) and accepted by the Drawee (Debtor). It is an acknowledgment of debt normally having a maturity period of 90 days. It can also be discounted with the bank before maturity.
4. Discuss the sub-markets of Money Market.
Ans: The money market isn’t a single unified entity; rather, it’s made up of several sub-markets, each specialized in specific short-term credit instruments.
These sub-markets include: (a) Call Money Market (b) Collateral Loan Market (c) Acceptance Market (d) Bill Market.
(a) Call Money Market: In the call money market, call loans or call money are dealt with. These loans are given for extremely short periods, typically ranging from 1 to 14 days. Usually, bill brokers and stock exchange dealers borrow call loans from commercial banks. These loans are repayable on demand, at the choice of the borrower or the lender. When the lender or bank recalls the call loans, the borrowers need to repay them immediately.
(b) Collateral Loan Market: The collateral loan market provides loans against securities like stocks and bonds. Borrowers receive their collateral back upon repaying the loan. If repayment isn’t possible, the lender assumes ownership of the collateral. Collateral loans are mainly provided by commercial banks to private parties and occasionally, larger banks extend such loans to smaller ones.
(c) Acceptance Market: The acceptance market emerges from trade transactions and revolves around banker’s acceptances. This is where financial intermediaries accept short-term legitimate trade bills. A banker’s acceptance is a draft drawn by a business upon a bank and accepted by it. It obligates the bank to pay a specified sum of money to a designated party on a particular future date. These acceptances are widely used to finance commercial transactions both domestically and internationally. They can be easily sold or discounted in the acceptance market.
(d) Bill Market: The bill market involves the buying and selling of various types of short-term bills or papers. Its primary activity is bill discounting, which is why it’s also called the discount market. This market handles both bills of exchange and treasury bills. A bill of exchange is a written order by the seller (drawer) to the buyer (drawee) to pay a specific sum of money immediately or on a fixed future date. Treasury bills are short-term government securities, usually lasting 3 months. The central bank sells these treasury bills on behalf of the government.
5. What are the key Institutions that operate within the money market and how do they contribute to functioning?
Or
Discuss the institutions on money market.
Ans: MONEY MARKET INSTITUTIONS; Money market institutions are involved in short-term borrowing and lending of funds. Essential players within the money market include commercial banks, central banks, acceptance houses, discount houses, bill brokers and non-bank financial institutions.
(a) Commercial Banks: Among the most important players in the money market are commercial banks. They play a vital role by supplying funds for trade and commerce. Commercial banks provide advances, discounts and rediscounts for bills of exchange, lend against promissory notes and deal with treasury bills.
(b) Central Bank: The central bank holds a significant position in the money market as the top financial institution. It serves as the leader and lender of last resort, effectively overseeing the money market’s operations.
(c) Non-Banking Financial Institutions: These institutions, such as investment banks and insurance companies, are also involved in short-term financing activities in the money market.
(d) Acceptance Houses: Acceptance houses are specialized institutions that focus on accepting and guaranteeing bills of exchange. They are often merchant bankers.
(e) Discount Houses: These specialized institutions engage in the discounting and rediscounting of bills. Discount houses handle various types of bills, including domestic and foreign bills, as well as government treasury bills. They borrow short-term funds from commercial banks for these operations.
(f) Bill Brakers: Bill brokers engage in the buying and selling of bills of exchange, along with other types of bills.
6. Discuss the Functions and Importance of the Money Market.
Ans: A well-functioning money market plays a vital role in today’s economy, supporting the growth of trade and industry by quickly and effectively providing short-term funds. A strong money market is especially crucial in a modern digital economy. Here are the essential reasons behind the significance of a developed money market and its key functions:
i. Trade Financing: The money market is crucial for financing both local and international trade. It aids traders by discounting bills of exchange. This helps finance trade activities, with acceptance houses and discount markets offering financial support for foreign trade.
ii. Industry Support: Industries greatly benefit from the money market, which assists in their growth. By discounting bills of exchange and commercial papers, the money market addresses the short-term working capital needs of industries, contributing to their development.
iii. Profitable Investments: Commercial banks are key players in the money market. They can invest their excess reserves in assets like short-term bills of exchange, which are highly liquid and easily converted into cash, enabling profitable investments.
iv. Balancing Saving and Investment: A well-developed and competitive money market establishes a balance between saving and investment. It helps align the supply and demand for loanable funds, promoting both saving and investment activities. It also facilitates the transfer of funds from sectors with surpluses to those with deficits.
v. Government Support: A robust money market benefits the government by providing short-term funds through treasury bills at low interest rates.
vi. Central Bank Assistance: The central bank is a vital authority in the country’s banking system, playing a significant role in the economy. A developed money market is essential for its smooth functioning and increases its overall efficiency.
vil. Self-Reliance for Commercial Banks: A well-established money market empowers commercial banks to be self-reliant. During emergencies, they can meet their needs by recalling their old short-term loans from the money market.
viii. Guiding Monetary Policy: The condition of the money market provides valuable insights into the monetary state of the economy. As a result, it guides the government in forming and adjusting monetary policies. In simple terms, a strong money market helps businesses, traders, banks and the government function smoothly by efficiently managing short-term funds and balancing financial activities.
7. What are type characteristics of a Developed Money Market?
Ans: In every country of the world, money market exists. Money Market of some countries are highly developed and money market of some countries are not well developed. Prof. S. N. Sen has described certain essential characteristics of a developed money market.
They are stated as follows:
a. Presence of a Central Bank: Presence of a strong central bank is an essential prerequisite for a developed money market. Because central bank provides the ultimate liquidity as well as regulates the working of the money market. A central bank functions as monetary and banking authority in then country. A strong central bank guides, controls, regulates the money market effectively. To fulfill the requirements of the money market, it formulates a suitable monetary policy.
b. A Well Organised Banking System: A developed money market possesses a well organised banking system. The banks are the principal suppliers of short-term funds. Therefore, their policies regarding loans and advances have greater impact on the entire money market. It constitutes the ‘nucleus of the whole money market’.
c. Availability of Proper Credit Instruments: A developed money market requires adequate availability of credit instruments like bills of exchange, treasury bills, short term government funds etc. These instruments should be of highest quality and easily negotiable. There should also be an adequate number of dealers and brokers in the money market who buy and sell these credit instruments.
d. Existence of Well Organised Sub Markets: A developed money market consists of well organised sub markets. Each and every sub market specialising in a particular type of short term financial asset, like bills of exchange, treasury bills, commercial papers, certificates of deposits, etc. The larger the number of sub markets, the broader and more developed will be the structure of the money market. The several sub markets of the money market together make a coherent money market.
e. Integrated Structure of the Money Market: A developed money market has integrated structure. Its various sub markets are very closely associated with each other. The information and funds move easily and quickly from one sub market to another sub market. There is free movement of lenders and borrowers between the different sub markets. Because of this the activities of one sub market have immediate influence on other sub markets.
f. Availability of Adequate Resources: A developed money market has availability of adequate resources to finance the transactions in the various sub markets. These resources may come from within the country and also from the foreign countries.
g. Existence of Specialised Institutions: A developed money market has specialised institutions like acceptance houses, discount houses, etc. These institutions are specialised in particular types of short- term financial asset. These institutions help in increasing the (operational) efficiency of money market and making the money market more competitive.
h. Other Factors: Besides the above, there are some other factors also which contribute to the development of a money market. These are highly developed industrial system, large volumes of industrial trade, stable political condition and favorable conditions for foreign investment, etc.
i. Uniformity of Interest Rates: in a developed money market, there exists uniformity in interest rates in different parts of the country.
j. So, when all these things come together, it makes a money market really strong and helpful for the economy to grow.
8. What are the similarities between Money Market and Capital Market?
Ans: The Money Market and Capital Market share several similarities and connections:
i. Complementary Nature: Money Market and Capital Market complement each other rather than compete. Their distinction lies primarily in the duration of finance they handle. Money Market focuses on short-term funds, while Capital Market deals with long-term funds.
ii. Common Institutions: Many institutions operate in both Money Market and Capital Market. For instance, commercial banks traditionally specialize in short-term funds but also offer long-term funds.
iii. Interdependence: Money Market and Capital Market are interdependent. Activities and policies in one market influence the other. Change in the money market can affect the capital market and vice versa.
9. Write the name of the apex financial institution in the money market of a country.
Ans: The apex financial institution in the money market of a country is usually the central bank.
10. What is the role of discount houses in the money market and what types of bills do they typically handle? How do they acquire the funds needed for their operations?
Ans: Discount houses are specialized institutions within the money market that focus on the discounting and rediscounting of bills. They engage in handling various types of bills, including domestic bills, foreign bills and government treasury bills.
To fund their operations, discount houses borrow funds from commercial banks for a short-term duration, which they then use for the discounting and rediscounting of bills. This allows them to facilitate financial transactions within the money market effectively.
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