Samacheer Kalvi Class 12 Commerce Solutions Chapter 6 Money Market

12th Commerce Guide Money Market Text Book Back Questions and Answers

 

I. Choose The Correct Answer.

 

Question 1. The money invested in the call money market provides high liquidity with ...........
(a) Low Profitability
(b) High Profitability
(c) Limited Profitability
(d) Medium Profitability
Answer: (a) Low Profitability
In simple words: When you put money in the call money market, you can get it back quickly, but it usually does not make a lot of profit. This market is mainly for very short-term borrowing and lending between banks.

🎯 Exam Tip: Remember that high liquidity often comes with lower returns, as is typical in very short-term money markets.

 

Question 2. A major player in the money market is the ...........
(a) Commercial Bank
(b) Reserve Bank of India
(c) State Bank of India
(d) Central Bank
Answer: (a) Commercial Bank
In simple words: Commercial banks are very important in the money market. They lend and borrow money for short periods to manage their daily cash needs.

🎯 Exam Tip: While the Reserve Bank of India is a regulator, commercial banks are the most active participants in day-to-day money market operations.

 

Question 3. Money Market provides.............
(a) Medium-term Funds
(b) Short-term Funds
(c) Long-term Funds
(d) Shares
Answer: (b) Short-term Funds
In simple words: The money market deals with money that is borrowed or lent for a very short time, usually less than one year. It helps businesses and governments get quick cash.

🎯 Exam Tip: Distinguish the money market (short-term) from the capital market (long-term) when answering questions about financial instruments.

 

Question 4. Money Market Institutions are ...........
(a) Investment Houses
(b) Mortgage Banks
(c) Reserve Bank of India
(d) Commercial Banks and Discount Houses
Answer: (d) Commercial Banks and Discount Houses
In simple words: Commercial banks and discount houses are key institutions in the money market. They help buy and sell short-term loans and financial papers.

🎯 Exam Tip: Understand the roles of different institutions in the money market, focusing on how they facilitate short-term lending and borrowing.

 

Question 5. Risk in the Money Market is ...........
(a) High
(b) Market Risk
(c) Low Credit and Market Risk
(d) Medium Risk
Answer: (c) Low Credit and Market Risk
In simple words: Generally, the money market has low risk because it deals with short-term loans. This means there is less chance that borrowers will not pay back their money, or that market values will change a lot.

🎯 Exam Tip: Short-term nature of money market instruments inherently leads to lower credit and market risks compared to long-term investments.

 

Question 6. Debt Instruments are issued by Corporate Houses are raising short-term financial resources from the money market are called ...........
(a) Treasury Bills
(b) Commercial Paper
(c) Certificate of Deposit
(d) Government Securities
Answer: (b) Commercial Paper
In simple words: When companies want to borrow money for a short time, they often issue something called commercial paper. It is a way for them to get quick cash from the money market.

🎯 Exam Tip: Remember that Commercial Paper is specifically a short-term debt instrument used by corporations to raise funds.

 

Question 7. The market for buying and selling of Commercial Bills of Exchange is known as a ...........
(a) Commercial Paper Market
(b) Treasury Bill Market
(c) Commercial Bill Market
(d) Capital Market
Answer: (c) Commercial Bill Market
In simple words: The commercial bill market is where people buy and sell commercial bills of exchange. These bills are like promises to pay money for goods at a later date.

🎯 Exam Tip: Each financial instrument has its specific market; clearly associating the instrument with its market is key.

 

Question 8. A marketable document of title to a time deposit for a specified period may be referred to as a ...........
(a) Treasury Bill
(b) Certificate of Deposit
(c) Commercial Bill
(d) Government Securities
Answer: (b) Certificate of Deposit
In simple words: A Certificate of Deposit is a document that shows you have kept money in a bank for a fixed time. You can also sell this document to someone else before the time is up.

🎯 Exam Tip: The key feature of a Certificate of Deposit is its marketability, meaning it can be traded before maturity.

 

Question 9. Treasury Bill commands ...........
(a) High Liquidity
(b) Low Liquidity
(c) Medium Liquidity
(d) Limited Liquidity
Answer: (a) High Liquidity
In simple words: Treasury Bills are very easy to sell and turn into cash quickly without losing much value. This is because they are issued by the government and are considered very safe.

🎯 Exam Tip: Government-issued securities like Treasury Bills are known for high liquidity due to their safety and broad acceptance.

 

Question 10. Government Securities are issued by agencies such as ...........
(a) Central Government
(b) State Governments
(c) Semi-government Authorities
(d) All of the options
Answer: (d) All of the options
In simple words: All levels of government – central, state, and even some local authorities – can issue government securities. They do this to borrow money for various public projects and expenses.

🎯 Exam Tip: Remember that government securities are a broad category, and different government bodies issue them for their funding needs.

 

II. Very Short Answer Questions.

 

Question 1. Define the term “Money Market”.
Answer: According to Crowther, "the money market is the collective name given to the various firms and institutions that deal in the various grades of near money”. This market handles short-term borrowing and lending, helping to manage daily cash flow in the economy.
In simple words: The money market is a name for all the different businesses and groups that handle short-term money and things that are almost like money.

🎯 Exam Tip: When defining a term, citing an expert's definition (like Crowther's) adds authority to your answer.

 

Question 2. What is a CD market?
Answer: The CD market, or Certificate of Deposit market, is a place where people buy and sell certificates of deposit. These are special savings certificates that banks offer, allowing investors to deposit money for a fixed period at a fixed interest rate. They can also be traded among investors.
In simple words: The CD market is where people trade special bank savings certificates called Certificates of Deposit.

🎯 Exam Tip: Clearly state that 'CD' stands for 'Certificate of Deposit' and explain its primary function in the market.

 

Question 3. What is Government Securities Market?
Answer: The Government Securities Market is where governments (central, state, or local) borrow money for a short or long time. They do this by selling special papers called government securities. These are safe investments because the government promises to pay them back. People buy these securities because they are considered very safe, as the government is unlikely to default.
In simple words: This market helps the government get money by selling safe promises to pay back later.

🎯 Exam Tip: Emphasize that government securities are considered very safe, which makes them attractive to investors.

 

Question 4. "What do you mean by Auctioning?
Answer: Auctioning is a way of trading where things are sold to the person who offers the most money. In this process, merchants bid against each other, and the securities are eventually sold to the highest bidder. This method ensures fair pricing through competition.
In simple words: Auctioning is a method where items are sold to the person who offers the highest price, often after many people bid against each other.

🎯 Exam Tip: When explaining auctioning, highlight the competitive bidding process and that the highest bid wins.

 

Question 5. What do you mean by Switching?
Answer: Switching, in the money market, is when the central bank changes one type of government security for another. This is usually done to keep the maturities of government debts well-managed. It helps balance when different government bonds need to be repaid. This action helps the central bank manage the flow of money in the economy without directly affecting interest rates too much.
In simple words: Switching means exchanging one government security for another to better manage when they are due.

🎯 Exam Tip: Mention that switching is typically a strategy used by central banks for debt management and liquidity control.

 

III. Short Answer Questions.

 

Question 1. What are the features of Treasury Bills? (FILM V)
Answer: The features of Treasury Bills are:
1. Issuer: The government issues Treasury Bills to borrow money. These bills are considered very safe because they are backed by the government.
2. Finance Bills: They are a type of short-term financial instrument used to meet the government's immediate cash needs.
3. Liquidity: Treasury Bills are highly liquid, meaning they can be easily sold and converted into cash quickly without much loss of value. They are easily traded in the money market.
4. Vital Source: They serve as a crucial way for the government to raise money for its short-term expenses.
5. Monetary Management: The central bank uses Treasury Bills as a tool to manage the money supply in the economy, controlling inflation or stimulating growth.
In simple words: Treasury Bills are short-term loans from the government. They are safe, easy to sell, and help the government get quick money and manage the country's money supply.

🎯 Exam Tip: Use the mnemonic (FILM V) to recall the main features: Finance, Issuer, Liquidity, Monetary management, Vital source.

 

Question 2. Who are the participants of the Money Market?
Answer: Many different groups take part in the money market:
1. Central Banks: Such as the Reserve Bank of India, they manage the money supply and oversee the market.
2. Government: Both central and state governments borrow money by issuing short-term papers.
3. Private and Public Banks: These are major players, lending and borrowing money daily.
4. Mutual Funds: They invest in money market instruments on behalf of their clients.
5. Public: Individuals and businesses also participate, mainly through banks and other financial institutions.
6. RBI and SBI: The Reserve Bank of India (RBI) is the main regulator, while State Bank of India (SBI) is a large commercial bank participant.
7. Insurance Companies: They invest their large funds in short-term safe instruments.
8. Non-Banking Financial Institutions (NBFI): These companies also deal in short-term funds.
9. Commercial Banks: These banks are key players, providing and demanding liquidity.
10. State Governments: They raise short-term funds for their needs.
In simple words: Many groups like banks, governments, mutual funds, and insurance companies are part of the money market. They all help to lend and borrow money for short times.

🎯 Exam Tip: When listing participants, categorize them (e.g., banks, government, financial institutions) to ensure a comprehensive answer.

 

Question 3. Explain the types of Treasury Bills.
Answer: Treasury Bills are short-term borrowing tools used by the Central Government to meet its urgent financial needs. These bills are typically offered for three different maturity periods:
1. 91 days Treasury Bills: These are very short-term bills that mature after 91 days from their issue date. They provide quick liquidity for the government.
2. 182 days Treasury Bills: These bills have a maturity period of 182 days, offering a slightly longer investment duration than the 91-day bills.
3. 364 days Treasury Bills: These are the longest-term Treasury Bills, maturing after 364 days. They are still considered short-term instruments as their maturity is less than one year. Investors choose based on their need for funds and expected returns.
In simple words: Treasury Bills are loans to the government that are paid back in either 91 days, 182 days, or 364 days. They help the government get money for a short time.

🎯 Exam Tip: Remember the three common maturity periods for Treasury Bills, all falling within the short-term definition (less than one year).

 

Question 4. What are the features of a Certificate of Deposit? (TINDU)
Answer: The features of a Certificate of Deposit (CD) are:
1. Transfer freely by endorsement and delivery: CDs can be easily sold or transferred to another person just by signing them over and handing them over. They are highly negotiable.
2. Issued at discount to face value: CDs are often sold for less than their full value, and at maturity, the holder receives the full face value, earning a profit.
3. No grace days: Unlike some other financial instruments, CDs do not have any extra "grace" days for payment after their maturity date. The payment is due exactly on the fixed date.
4. Document of title to Time Deposit: A CD is a formal document proving that a person has deposited a certain amount of money with a bank for a fixed period.
5. Unsecured negotiable instruments: Although issued by banks, CDs are usually unsecured, meaning they are not backed by any specific collateral. However, their negotiability makes them attractive for investors.
In simple words: A Certificate of Deposit is a bank document for money deposited for a fixed time. You can sell it to others, it is bought at a lower price than its face value, and it must be paid back on a specific date without any extra time.

🎯 Exam Tip: Highlight the negotiability and fixed maturity as core features that distinguish CDs from regular deposits.

 

Question 5. What are the types of Commercial Bill?
Answer: Commercial bills are a common tool in the money market used for short-term financing. They can be classified into several types:
1. Demand and Usance Bills: Demand bills are payable immediately when presented. Usance bills, however, are payable after a certain period of time.
2. Clean Bills and Documentary Bills: Documentary bills are supported by documents of title to goods, like a bill of lading, proving the shipment of goods. Clean bills do not have such documents attached.
3. Inland Bills and Foreign Bills: Inland bills are drawn and payable within the same country. Foreign bills are drawn in one country and payable in another country.
4. Indigenous Bills: These bills are traditionally used in India and are governed by local customs and trade practices, often used in rural areas.
5. Accommodation and Supply Bills: Accommodation bills are drawn without any real trade transaction behind them; they are purely for financial convenience. Supply bills are drawn by suppliers on government departments for the supply of goods.
In simple words: Commercial bills are different types of promises to pay for goods or services. They can be paid at once or later, can come with shipping papers or not, can be for trade within a country or between countries, can be based on local rules, or used just to get money or for government supplies.

🎯 Exam Tip: Understand the key distinction for each type (e.g., demand vs. usance for payment timing; clean vs. documentary for attached papers).

 

IV. Long Answer Questions.

 

Question 1. Differentiate between the Money Market and Capital Market.
Answer: The money market and capital market are two important parts of the financial system, but they deal with different types of funding and investments.
**Money Market – Definition:** According to Crowther, "the money market is the collective name given to the various firms and institutions that deal in the various grades of near money". This market is crucial for short-term liquidity management.
**Capital Market – Definition:** The capital market is a complex system of institutions, investments, and practices. It has strong links between the demand for and supply of different types of long-term capital, as described by K. Datta Rurald. This market helps raise money for long-term projects.

In simple words: The money market is for short-term money needs, usually less than a year, with low risk. The capital market is for long-term investments, more than a year, and usually has higher risk. The central bank manages the money market, while both the central bank and SEBI manage the capital market.

🎯 Exam Tip: Use a clear table format for differentiation questions, ensuring each point of comparison distinctly highlights differences between the two concepts.

 

Question 2. Explain the characteristics of the Money Market? (SMS WED)
Answer: The money market has several important features that define its operation and purpose:
1. Short-term Funds: It is a market purely for dealing with funds that are needed for a short period, typically less than one year, or for assets that are almost like money.
2. Maturity Period: All financial instruments traded in this market have a maturity period of up to one year only. This short duration makes them highly liquid.
3. Conversion of Cash: The money market deals with assets that can be easily and quickly turned into cash with minimal loss and very low transaction costs. This is essential for maintaining liquidity.
4. No Formal Place: Unlike a stock exchange, the money market does not have one physical meeting place. Transactions often happen over the phone or electronically, with written documents exchanged later.
5. Sub-markets: It is not just one big market. Instead, it includes many smaller markets, each specializing in a particular type of short-term financing, like the call money market or bill market.
6. Role of Market: The main parts of the money market are the Central Bank and Commercial Banks. Commercial banks play a very important role in this market by providing and borrowing funds.
7. Highly Organized Banking System: Commercial banks are at the center of the money market. They are the main suppliers of short-term funds and help keep the market running smoothly.
8. Existence of Secondary Market: There should be an active secondary market for these instruments, where previously issued securities can be bought and sold before maturity.
9. Demand and Supply of Funds: For a healthy money market, there must be a strong demand from borrowers and a steady supply from lenders for short-term funds.
10. Wholesale Market: This is a market where large amounts of money or financial assets are traded. It is not for small, individual transactions.
11. Flexibility: The regulatory rules for the money market are quite flexible, allowing for new financial instruments to be introduced often.
12. Presence of a Central Bank: The central bank plays a vital role. It holds the cash reserves of banks and helps them with money during difficulties by buying their eligible securities.
In simple words: The money market deals with short-term money (less than a year) that can be quickly turned into cash. It has many sub-markets, no single meeting place, and central and commercial banks are key players. It needs a good supply and demand for funds and allows for new types of instruments.

🎯 Exam Tip: When describing characteristics, use clear, concise points. Remember that the money market's core function is to meet short-term liquidity needs.

 

Question 3. Explain the Instruments of the Money Market.
Answer: The money market uses various instruments to facilitate short-term borrowing and lending. Here are the main ones:
**Instruments of Money Market:**
• Treasury Bills (T-Bills)
• Call and Short Notice Money
• Commercial Bills and Promissory Notes
• Inter-Bank Participation Certificates
• Commercial Papers
• Certificate of Deposit (CD)
• Repo Instruments

**Treasury Bills (T-Bills):**
• Treasury Bills are highly popular because they are issued by the Government, making them very liquid and safe.
• They are essentially a promise from the government to pay a specified amount to the holder on a due date.
• The period for which these bills are issued does not go beyond one year.

**Commercial Bill:**
• A Commercial Bill is a type of Bill of Exchange issued by a company to get money for its short-term needs.
• These bills typically mature in 30, 60, or 90 days.
• They are usually created when a seller of goods draws a bill on the buyer.

**Certificate of Deposits (CDs):**
• Certificates of Deposits are short-term deposit instruments issued by banks and other financial institutions to raise large amounts of money.
• These are issued in the form of promissory notes, promising to pay the holder a fixed sum on a future date.
• CDs are easily convertible into cash and have a specific face value and maturity date. This makes them attractive for short-term investments.
• They are also known as Negotiable Certificates of Deposits because they can be traded.
In simple words: Money market instruments are tools like Treasury Bills, Commercial Bills, and Certificates of Deposit. Treasury Bills are safe government promises to pay back money in less than a year. Commercial Bills are company promises for trade. Certificates of Deposit are bank promises that can be traded.

🎯 Exam Tip: For each instrument, clearly state who issues it, its typical maturity, and its main purpose or feature.

 

Question 4. Explain the features and types of Commercial Bills.
Answer: Commercial bills are important short-term financial instruments used in trade. They have specific features and types:

**The features of the Commercial Bills are as follows:**
1. Drawer: This is the person or company that creates and signs the bill, usually the seller of goods.
2. Acceptor: This is the person or company who agrees to pay the bill at maturity, usually the buyer of goods.
3. Payee: This is the person or company to whom the payment will be made, often the drawer or a third party.
4. Discounter: A financial institution, like a bank, that buys the bill before its maturity date at a discounted price.
5. Endorser: A person who transfers the bill to another party by signing it on the back.
6. Assessment: The process of evaluating the creditworthiness of the parties involved in the bill.
7. Maturity: The specific date on which the bill becomes due for payment.
8. Credit Rating: An assessment of the ability of the drawer or acceptor to meet their financial obligations under the bill.

**Types:**
1. Demand and Usance Bills: A demand bill is payable immediately upon being presented. A usance bill, however, specifies a future date for payment.
2. Clean Bills and Documentary Bills: Documentary bills are backed by other documents that prove the shipment or ownership of goods. Clean bills do not have such supporting documents.
3. Inland Bills and Foreign Bills: Inland bills are those drawn and payable within the same country. Foreign bills are involved in international trade, drawn in one country and payable in another.
4. Indigenous Bills: These are traditional bills used locally, especially in India, and follow local customs and practices of trade.
5. Accommodation and Supply Bills: Accommodation bills are not based on an actual trade transaction; they are used to help parties raise funds. Supply bills are drawn by contractors or suppliers on government departments for the supply of goods.
In simple words: Commercial bills are signed papers used in trade. Their features include who draws, accepts, and pays them, how they are sold early, and when they are due. Types include those paid right away or later, with or without documents, for local or international trade, traditional local bills, and bills used just to get money or for government supplies.

🎯 Exam Tip: Clearly define each feature and type, providing a brief example or context where applicable to show understanding.

 

Question 5. What are the characteristics of Government Securities? (SMART IG)
Answer: Government securities (G-Secs) are debt instruments issued by the government. They have several distinct characteristics:
1. Agencies: Government securities are issued by different levels of government, including the Central Government, State Governments, and sometimes semi-government authorities or local government bodies.
2. RBI Special Role: The Reserve Bank of India (RBI) plays a special and active part in buying and selling these securities. It uses these operations to manage the money supply in the economy.
3. Nature of Securities: These securities are considered very safe investments because the government guarantees the payment of interest and the repayment of the principal amount. This makes them low-risk.
4. Liquidity Profile: The ease with which gilt-edged securities (high-quality government bonds) can be converted into cash varies. Generally, those issued by the Central Government are highly liquid.
5. Tax Rebate: A key attractive feature of these securities is that they often come with various tax benefits or incentives for investors, making them more appealing.
6. Market: The market for G-Secs, especially the Gilt-Edged Market, is an Over-The-Counter (OTC) market. This means each sale and purchase is negotiated directly, rather than through a central exchange.
7. Forms: Government securities can take different forms such as inscribed stock (registered in the holder's name), stock certificates, promissory notes, and bearer bonds (where the holder is presumed to be the owner).
8. Participants: The government securities market includes various participants like the government itself, banks, financial institutions, and even small investors.
9. Trading: While large institutional holders like banks actively trade G-Secs on stock exchanges, smaller and less active participants also take part in trading.
10. Issue Mechanism: The Public Debt Office (PDO) of the RBI is responsible for managing the issuance of government securities.
11. Issue opening: The public is informed about new issues of securities a few days before the subscription period opens, allowing time for investors to prepare.
12. Grooming Gradual: This refers to the RBI buying securities that are close to their maturity date from the stock exchanges. This helps to manage the government's debt repayments.
13. Switching: Switching is when the RBI buys one security and sells another. This is done in the secondary market as part of its open market operations to adjust the maturity profile of its debt holdings.
14. Auctioning: Many government securities are sold through an auction process where interested buyers bid for the securities, and they are sold to the highest bidders.
In simple words: Government securities are safe investments issued by different government levels. The RBI manages them to control money flow. They come in various forms, offer tax benefits, and are traded by many players. They can be bought through auctions, and the RBI might also exchange them or buy back those nearing maturity.

🎯 Exam Tip: Focus on safety, issuer, and the RBI's role in monetary management as core characteristics of government securities.

I. Choose The Correct Answer.

 

Question 1. The money invested in the call money market provides high liquidity with ..........
(a) Low Profitability
(b) High Profitability
(c) Limited Profitability
(d) Medium Profitability
Answer: (a) Low Profitability
In simple words: When money is put into the call money market, it can be taken out very quickly, but it usually doesn't earn a lot of profit. This is because call money is for very short-term borrowing.

🎯 Exam Tip: Remember that call money is known for its high liquidity (easy to convert to cash) but generally offers low returns, which is a key characteristic of short-term money market instruments.

 

Question 2. A major player in the money market is the ................
(a) Commercial Bank
(b) Reserve Bank of India
(c) State Bank of India
(d) Central Bank
Answer: (a) Commercial Bank
In simple words: Commercial banks are very important in the money market, dealing with short-term funds for different needs. They play a big role in both giving and taking money for short periods.

🎯 Exam Tip: Identify the key institutions in the money market. Commercial banks are primary participants, actively involved in daily transactions, alongside central banks and other financial entities.

 

Question 3. Money Market provides...........
(a) Medium-term Funds
(b) Short-term Funds
(c) Long-term Funds
(d) Shares
Answer: (b) Short-term Funds
In simple words: The money market is designed for handling funds that are needed for a very short period, usually less than one year. It helps businesses and governments get quick cash.

🎯 Exam Tip: Distinguish between money market and capital market. Money markets focus on short-term funds (up to one year), while capital markets deal with long-term investments.

 

Question 4. ............Bills are governed by native custom or usage of Trade.
(a) Accommodation
(b) Inland
(c) Supply
(d) Indigenous
Answer: (d) Indigenous
In simple words: Indigenous bills are special types of bills that follow the old, traditional ways and rules of trade in a particular local area. They are often used by local traders.

🎯 Exam Tip: Understand the different types of bills. "Indigenous" refers to those governed by local customs, differing from other types like inland or foreign bills.

 

Question 6. Pick the odd one out:
(a) Endorser
(b) Endorsee
(c) Grace days
(d) Creditor
Answer: (c) Grace days
In simple words: An endorser, endorsee, and creditor are all people or entities involved in financial agreements. "Grace days" is a period of time, not a person, making it different from the others.

🎯 Exam Tip: When asked to find the odd one out, classify the terms. Here, the options are roles in a transaction versus a time period.

 

Question 6. The issuers of the certificate of deposits are _____
(i) commercial banks
(ii) cooperative banks
(iii) private company
(iv) financial institutions
(a) (i) and (ii)
(b) (i) and (iii)
(c) (i) and (iv)
(d) (ii) and (iii)
Answer: (c) (i) and (iv)
In simple words: Certificates of Deposit (CDs) are usually issued by commercial banks and other financial institutions. These entities use CDs to raise money for a fixed period.

🎯 Exam Tip: Remember that Certificates of Deposit are money market instruments primarily issued by banks and financial institutions to secure short-term funds.

 

II. Match The Following.

 

Question 1. Match List I with List II

(a) (i) 4, (ii) 3, (iii) 1, (iv) 2
(b) (i) 4, (ii) 3, (iii) 2, (iv) 1
(c) (i) 4, (ii) 1, (iii) 3, (iv) 2
(d) (i) 1, (ii) 3, (iii) 2, (iv) 4
Answer: (a) (i) 4, (ii) 3, (iii) 1, (iv) 2
In simple words: This match helps us understand which market deals with what. Treasury bills are issued by commercial banks, CD markets have high liquidity, money markets are for short-term funds, and capital markets handle long-term funds.

🎯 Exam Tip: To answer matching questions, understand the core function and characteristics of each market or instrument. For example, money market is short-term, capital market is long-term.

 

Question 2. Match List I with List II

(a) (i) 3, (ii) 1, (iii) 2,(iv) 4.
(b) (i) 3, (ii) 1, (iii) 4, (iv) 2.
(c) (i) 3, (ii) 2, (iii) 4, (iv) 1.
(d) (i) 3, (ii) 4, (iii) 1, (iv) 2.
Answer: (a) (i) 3, (ii) 1, (iii) 2,(iv) 4.
In simple words: This helps define different kinds of bills. Inland bills are used within India, documentary bills come with papers, clean bills do not have any extra papers, and foreign bills are used for trade outside India.

🎯 Exam Tip: Understand the characteristics of each bill type: Inland (domestic), Foreign (international), Documentary (with trade documents), and Clean (without trade documents).

 

III. Assertion and Reason.

 

Question 1. Assertion (A): Treasury Bills enjoy a higher degree of liquidity since they are issued by Government.
Reason (R): The Government promises to pay the specific amount on the due date
(a) (A) is true (R) is False
(b) (A) is False (R) is True
(c) Both (A) and (R) are False
(d) Both (A) and (R) are True
Answer: (d) Both (A) and (R) True
In simple words: Both statements are correct. Treasury bills are easy to sell quickly because they are backed by the government, which also guarantees repayment on time. This makes them a very safe and reliable investment.

🎯 Exam Tip: For Assertion-Reason questions, first check if each statement is individually true, then see if the reason correctly explains the assertion.

 

Question 2. Assertion (A): A demand bill is one wherein no specific time of payment is mentioned.
Reason (R): So, it has to be payable immediately on demand.
(a) Both (A) and (R) are correct
(b) Both (A) are (R) are incorrect
(c) A is correct
(d) R is incorrect
Answer: (a) Both (A) and (R) are correct
In simple words: Both statements are true and connected. A demand bill does not state a future date for payment, so the money must be paid right away when the bill is presented. This is how demand bills work.

🎯 Exam Tip: Understand that the defining characteristic of a demand bill is its immediate payability upon presentation, which directly results from the absence of a specified maturity date.

 

IV. Very Short Answer Questions.

 

Question 1. What is Grooming Gradual?
Answer: Grooming gradual refers to the RBI buying back government securities that are about to mature from the stock exchanges. This is done to make it easier for the government to repay these securities when they become due. It helps manage the government's debt smoothly.
In simple words: "Grooming gradual" means the RBI buys government bonds that are about to expire. This helps the government pay them back easily.

🎯 Exam Tip: When defining terms, specify the key actors (RBI), actions (acquiring securities), and purpose (facilitating redemption) to score full marks.

 

Question 2. What is the commercial bill market?
Answer: The commercial bill market is a place where Commercial Bills of Exchange are bought and sold. These bills are short-term financial instruments used by businesses to get money quickly for their daily operations. It helps businesses manage their cash flow.
In simple words: It is a market where businesses buy and sell special papers called Commercial Bills to get short-term money.

🎯 Exam Tip: Define the commercial bill market by stating what is traded (Commercial Bills of Exchange) and its purpose (short-term financing for trade).

 

Question 3. What is Liquidity Profile?
Answer: Liquidity profile describes how easily a financial asset can be converted into cash without losing much value. For gilt-edged securities (government bonds), their liquidity profile can vary, but generally, securities issued by the Central Government are highly liquid, meaning they are very easy to sell quickly. This makes them attractive to investors looking for safe and accessible investments.
In simple words: Liquidity profile shows how fast and easily something can be turned into cash without losing its value. Government securities usually have high liquidity.

🎯 Exam Tip: Explain "liquidity profile" by focusing on the ease and speed of conversion to cash and illustrating it with an example like gilt-edged securities.

 

Question 4. Explain the two oldest money markets.
Answer: The two oldest and most developed money markets in the world are:

• The "London Money Market" is considered the oldest and most advanced money market globally.
• The "New York Money Market" is the second most developed and influential money market in the world.

These markets have a long history of trading short-term financial instruments and play a crucial role in global finance.
In simple words: The two oldest and most important money markets are the London Money Market and the New York Money Market.

🎯 Exam Tip: For questions asking to list specific examples, clearly state each point and add a brief, differentiating detail if possible.

 

V. Short Answer Questions.

 

Question 1. What are sub-markets?
Answer: The money market is not a single, uniform market; it is made up of several smaller parts called sub-markets. Each sub-market specializes in a particular type of financial activity or instrument. Examples include the Call Money Market, which deals with very short-term loans, the Acceptance Market, and the Bill Market. These specialized sections help the overall money market function smoothly.
In simple words: Sub-markets are smaller, specialized parts within the main money market, each focusing on a specific type of short-term financing.

🎯 Exam Tip: Define sub-markets as specialized segments of a larger market and provide a few examples to illustrate your point, such as Call Money Market or Bill Market.