BBA50112_Module II_
Practice Set with Answer
Long Answer Type Questions (for 5 marks)
Q1. Define a financial market and explain any two of its core functions with suitable
examples.
Answer:
A financial market is a network of institutions, individuals, instruments, and rules that
facilitate the buying and selling of financial assets such as equity shares, debt securities,
currencies, and derivatives.
Two core functions:
1. Efficient Allocation of Resources – Funds are directed to projects/sectors with the
highest expected returns.
Example: Infrastructure bonds funding highway projects.
2. Liquidity Creation – Ensures quick conversion of securities into cash without
significant value loss.
Example: NSE trading systems providing instant order execution.
Q2. Differentiate between the money market and the capital market, giving at least one
instrument and example for each.
Answer:
Basis Money Market Capital Market
Duration Short-term (<1 year) Long-term (>1 year)
Instruments Treasury Bills, Commercial Papers Equity shares, Corporate Bonds
Example CPs issued by Reliance Industries Zomato IPO (2021)
Q3. Discuss any three major functions of the money market and their significance in the
Indian context.
Answer:
1. Liquidity Management – Banks borrow/lend to meet statutory reserves. Example:
Overnight call money market between SBI and HDFC Bank.
2. Monetary Policy Transmission – RBI uses repo/reverse repo to control liquidity and
interest rates.
3. Safe Investment – Low default risk, suitable for risk-averse investors such as
insurance companies.
Significance: Supports RBI’s Liquidity Adjustment Facility and ensures smooth
short-term financing in India.
Q4. Explain Treasury Bills and Commercial Papers as money market instruments.
Answer:
• Treasury Bills (T-Bills): Short-term government securities (91, 182, or 364 days)
issued at a discount and redeemed at face value.
• Commercial Papers (CPs): Unsecured promissory notes issued by corporates to
meet short-term working capital needs, usually at a discount.
Q5. Define the capital market and describe its two main components with examples.
Answer:
The capital market is a platform for raising long-term funds through debt and equity
instruments.
Two components:
1. Primary Market – Where new securities are issued. Example: LIC IPO (2022).
2. Secondary Market – Where existing securities are traded. Example: Infosys shares
traded on NSE.
Q6. What is the primary market? Explain any two types of issues used to raise capital.
Answer:
The primary market, or New Issue Market, is where securities are offered for the first time.
Two types of issues:
1. Public Issue – Offered to the public via IPO or FPO.
2. Rights Issue – Offered to existing shareholders in proportion to their holdings.
Q7. Describe the process of issuing securities in the primary market.
Answer:
1. Preparation of Prospectus – Detailed document about the issue.
2. SEBI Approval – Regulatory clearance.
3. Price Determination – Through book-building or fixed price method.
4. Subscription – Investors apply via ASBA.
5. Allotment & Listing – Securities allotted and listed on exchanges.
Q8. Explain the functions of the secondary market and name any two major stock
exchanges in India.
Answer:
Functions:
1. Provides liquidity to securities.
2. Facilitates price discovery.
3. Encourages capital formation.
Two major stock exchanges:
• BSE – Asia’s oldest exchange.
• NSE – India’s largest by turnover.
Q9. Outline the steps in the trading cycle on stock exchanges and explain the role of risk
management mechanisms.
Answer:
Trading cycle:
1. Order Placement
2. Matching & Execution
3. Trade Confirmation
4. Clearing & Settlement (T+2 cycle)
Risk management:
• Margins (initial, exposure, mark-to-market)
• Circuit Breakers to control volatility
• Trade Guarantee Funds to ensure settlement.
Q10. State the objectives of SEBI and mention any two of its key powers in regulating
the capital market.
Answer:
Objectives:
1. Protect investors’ interests.
2. Promote market development.
3. Regulate market intermediaries.
Two key powers:
4. Regulate exchanges, brokers, and merchant bankers.
5. Prevent insider trading through surveillance and penalties.
Short Answer Type Questions (for 3 marks)
Q1. What is meant by ‘Price Discovery’ in financial markets? Give an example.
Answer: Price discovery is the process by which financial markets determine the fair price of
assets based on supply and demand.
Example: Stock price changes after a company’s earnings announcement.
Q2. List any three classifications of financial markets with examples.
Answer:
1. Money Market – Short-term funds (e.g., Treasury Bills).
2. Capital Market – Long-term funds (e.g., Equity Shares).
3. Derivatives Market – Risk transfer instruments (e.g., Futures, Options).
Q3. Give two key features of the money market and one example of a money market
instrument.
Answer:
• High liquidity.
• Predominantly institutional participation.
Example: Commercial Paper.
Q4. Mention three major instruments of the money market.
Answer:
1. Treasury Bills (T-Bills).
2. Commercial Papers (CPs).
3. Certificates of Deposit (CDs).
Q5. Differentiate between the primary market and the secondary market (any two
points).
Answer:
• Primary Market: New securities are issued for the first time.
• Secondary Market: Existing securities are traded among investors.
Q6. State any three functions of the secondary market.
Answer:
1. Provides liquidity to investors.
2. Facilitates price discovery.
3. Encourages capital formation.
Q7. Write any three key terms related to stock exchange trading.
Answer:
1. Demat Account – Electronic holding of shares.
2. Trading Account – Used to place buy/sell orders.
3. Contract Note – Legal proof of trade.
Q8. Mention any three objectives of SEBI.
Answer:
1. Protect investors’ interests.
2. Promote the development of the securities market.
3. Regulate the working of market intermediaries.
Q9. What are circuit breakers in stock exchanges?
Answer: Circuit breakers are mechanisms to temporarily halt trading when price movements
exceed predefined limits, thereby controlling extreme volatility.
Q10. Name any three major stock exchanges in India.
Answer:
1. Bombay Stock Exchange (BSE).
2. National Stock Exchange (NSE).
3. Over the Counter Exchange of India (OTCEI).