FM Module 1

Q.1) Define Financial system & mention its components.

Ans. A financial system is a set of institutions, markets, and instruments that allow the transfer of
money between savers and borrowers. It is the system that allows people to save money, invest
money, and borrow money.
The components of a financial system include:
a) Financial institutions: Financial institutions are organizations that provide financial services to
businesses and individuals. They include banks, insurance companies, investment companies,
and brokerage firms.
b) Financial markets: Financial markets are where buyers and sellers of financial assets come
together to trade. They include stock markets, bond markets, and foreign exchange markets.
c) Financial instruments: Financial instruments are the contracts that are traded in financial
markets. They include stocks, bonds, and derivatives.
d) Financial regulators: Financial regulators are government agencies that oversee the financial
system. They are responsible for ensuring that the system is stable and that investors are
protected.
Q.2) Differentiate between money market & capital market.
Ans.
Feature Money Market Capital Market

Short-term (less than 1

Maturity Long-term (more than 1 year)
year)

Risk Low-risk High-risk

Liquidity Highly liquid Less liquid

Meet short-term financing

Purpose Raise long-term financing
needs

Businesses, governments, and

Participants Financial institutions
individuals

Q.3) What are the basic financial instrument.

Ans. some of the basic financial instruments:
a) Money market instruments: These are short-term debt securities issued by governments,
corporations, and other institutions. They are typically used to meet short-term financing
needs. Examples of money market instruments include Treasury bills, commercial paper, and
bankers' acceptances.
b) Bonds: These are long-term debt securities issued by governments, corporations, and other
institutions. They typically pay a fixed interest rate over a specified period of time. Examples
of bonds include corporate bonds, government bonds, and municipal bonds.
c) Stocks: These represent ownership in a company. When you buy a stock, you are essentially
buying a small piece of the company. Stocks can be traded on stock exchanges and can
appreciate in value over time.
d) Derivatives: These are financial instruments that derive their value from another asset, such as
a stock, bond, or currency. Derivatives can be used to hedge against risk or to speculate on the
future price of an asset. Examples of derivatives include options, futures, and swaps.
 e) Commodities: These are physical goods that are traded on commodity exchanges. Examples
of commodities include oil, gold, and wheat.
f) Foreign exchange: This is the buying and selling of currencies. It is used to hedge against risk
or to speculate on the future value of a currency.
Q.4) List the classification of financial markets.
Ans. classifications of financial markets:
a) By maturity: Financial markets can be classified by the maturity of the financial instruments
that are traded. The money market is for short-term instruments, typically with maturities of
less than one year. The capital market is for long-term instruments, typically with maturities
of more than one year.
b) By asset class: Financial markets can also be classified by the asset class of the financial
instruments that are traded. The stock market is for stocks, which represent ownership in a
company. The bond market is for bonds, which are debt securities issued by governments,
corporations, and other institutions. The foreign exchange market is for currencies. The
commodity market is for physical goods, such as oil, gold, and wheat.
c) By organization: Financial markets can also be classified by their organization. Organized
markets are regulated exchanges where buyers and sellers come together to trade financial
instruments. Unorganized markets are not regulated and are typically used for trading illiquid
or exotic financial instruments.
d) By geography: Financial markets can also be classified by their geography. Domestic markets
are for financial instruments that are issued in a particular country. International markets are
for financial instruments that are issued in multiple countries.
Q.5) Explain the concepts of certificates of deposit.
Ans. A certificate of deposit (CD) is a time deposit, a type of savings account, in which the depositor
agrees to leave a certain sum of money in the bank for a fixed period of time, at a fixed interest rate.
CDs typically offer higher interest rates than regular savings accounts, but they also have stricter
withdrawal rules.
Some of the key features of certificates of deposit:
a) High interest rates: CDs typically offer higher interest rates than regular savings accounts.
b) Safe and secure: CDs are insured by the FDIC up to $250,000.
c) Fixed maturity: CDs have a fixed maturity, which means that you agree to leave your money
in the bank for a specified period of time.
d) Early withdrawal penalties: You may have to pay an early withdrawal penalty if you withdraw
your money from a CD before the maturity date.
e) Limited liquidity: CDs have limited liquidity, which means that you cannot access your
money easily.
Q.6) Define treasury bills & their features.
Ans. A Treasury bill (T-bill) is a short-term debt security issued by the United States government. T
bills are considered to be one of the safest investments available, and they are often used as a
benchmark for other investments.
some of the key features of treasury bills:
a) Issued by the US government: T-bills are backed by the full faith and credit of the US
government, which means that they are considered to be one of the safest investments
available.
b) Short-term maturities: T-bills have maturities of 3 months, 6 months, and 12 months. This
makes them a good option for investors who want to invest for a short period of time.
c) Low risk: T-bills are considered to be a low-risk investment. This is because they are backed
by the US government and have short maturities.
d) Liquidity: T-bills are highly liquid, meaning that they can be easily bought and sold. This
makes them a good option for investors who need to access their money quickly.
e) Low interest rates: T-bill interest rates are typically lower than interest rates on other types of
investments, such as bonds. This is because T-bills are considered to be a safe investment.
Q.7) Explain the characteristics of equity shares.
Ans. Equity shares, also known as stocks, are a type of security that represents ownership in a
company. When you buy an equity share, you are essentially buying a small piece of the
company.
Equity shares have the following characteristics:
i. Ownership: Equity shares represent ownership in a company. This means that you are entitled
to a share of the company's profits, if any.
ii. Voting rights: Equity shares typically come with voting rights. This means that you have a say
in how the company is managed.
iii. Dividends: Equity shares may pay dividends. Dividends are a distribution of profits to
shareholders.
iv. Liquidity: Equity shares are relatively liquid, meaning that they can be easily bought and sold.
v. Risk: Equity shares are considered to be a risky investment. This is because the value of
equity shares can go up or down, depending on the performance of the company.
Q.8) Describe the functions of commercial banks.
Ans. Commercial banks are financial institutions that provide a variety of services to businesses and
individuals, including accepting deposits, making loans, and providing other financial services.
The main functions of commercial banks are:
a) Accepting deposits: Commercial banks accept deposits from businesses and individuals.
These deposits can be used to fund loans and other investments.
b) Making loans: Commercial banks make loans to businesses and individuals. These loans can
be used for a variety of purposes, such as buying a house, starting a business, or financing a
college education.
c) Providing other financial services: Commercial banks also provide other financial services,
such as checking accounts, savings accounts, money market accounts, and debit cards. They
also offer investment services, such as brokerage accounts and mutual funds.
Q.9) Compare & contrast bands, preference shares & debunger.
Ans.

Q.10) Elaborate on the classification of financial institutions.

Ans. Financial institutions can be classified into several categories based on their functions,
ownership, and size.
Some of the most common classifications of financial institutions:
i. Depository institutions: These institutions accept deposits from customers and use those
deposits to make loans. They include commercial banks, savings banks, and credit unions.
ii. Investment institutions: These institutions help individuals and businesses invest their money.
They include investment banks, brokerage firms, and mutual funds.
iii. Insurance companies: These institutions provide insurance policies to protect individuals and
businesses from financial losses. They include life insurance companies, property and
casualty insurance companies, and health insurance companies.
 iv. Securities firms: These institutions trade securities, such as stocks, bonds, and derivatives.
They include investment banks, brokerage firms, and exchanges.
v. Regulatory agencies: These institutions are responsible for regulating the financial system.
They include the Federal Reserve, the Securities and Exchange Commission, and the
Commodity Futures Trading Commission.
Q.11) Discuss the role of stock exchange in the financial system.
Ans. The key roles of stock exchanges in the financial system:
a. Provide liquidity: Stock exchanges provide a liquid market for securities, which means that
buyers and sellers can easily buy and sell securities at a fair price. This is important for
businesses and investors, as it allows them to easily raise capital and invest their money.
b. Promote efficiency: Stock exchanges promote efficiency in the allocation of capital. This is
because they allow businesses to raise capital from a large pool of investors. This helps
businesses to grow and create jobs.
c. Facilitate price discovery: Stock exchanges facilitate price discovery, which means that they
help to determine the fair price of securities. This is done through the process of buying and
selling securities.
d. Provide risk transfer: Stock exchanges provide a way for investors to transfer risk. This is
done through the trading of derivatives, such as options and futures. Derivatives allow
investors to hedge against risk or speculate on the future price of an asset.
e. Encourage investment: Stock exchanges encourage investment by providing a liquid market
for securities. This makes it easier for investors to buy and sell securities, which can help
them to grow their wealth over time.
Q.12) Analyse the function & significance of the foreign currency markets.
Ans. The foreign exchange market (Forex) is the largest and most liquid financial market in the world.
It is where currencies are traded, and it is used by businesses, governments, and individuals to buy
and sell currencies.
The foreign exchange market performs a number of important functions, including:
a. Hedging against currency risk: Businesses and individuals can use the foreign exchange
market to hedge against currency risk. This means that they can protect themselves against
losses that can occur when the value of a currency changes.
b. Speculation: The foreign exchange market can also be used for speculation. This means that
traders can try to make money by betting on the future direction of currency prices.
c. Transactions: The foreign exchange market is also used to facilitate international transactions.
This includes things like buying and selling goods and services, making investments, and
borrowing money.
d. Price discovery: The foreign exchange market helps to determine the fair value of currencies.
This is done through the process of buying and selling currencies.
e. Risk management: The foreign exchange market can be used to manage risk. This includes
things like hedging against currency risk and diversifying investments.
f. Economic stability: The foreign exchange market can help to promote economic stability by
facilitating trade and investment.
The foreign exchange market is a complex and ever-changing market. However, it plays an important
role in the global economy and it is essential for businesses, governments, and individuals who need
to trade currencies.