Functions of Financial Market and Instruments of Money Market | 12th HSC S.P. Chapter 11

🚨 SMART STUDY ALERT: HOW TO USE THIS PAGE!

Dear Students, please note that this single page contains 2 to 3 DIFFERENT QUESTIONS from the same chapter to help you study easily in one place. Do not get confused by the length of the page!

For any 4-Mark Question (Question 5), exactly how much should you write in the exam?

Step 1: Write the Meaning / Introduction in just 2 to 3 lines (Carries 1 Mark).
Step 2: You DO NOT need to write all 10 points! Select and write ANY 4 to 5 POINTS with a short 2-line explanation for each (Carries 3 Marks).
Total Length: Your final answer in the board exam should be around 1 to 1.5 pages only!

📝 Note: Use the "Memory Trick" and "Objective Points" at the bottom of this page ONLY for your revision. You do not need to write them in your long answers!

The questions "State any four functions of Financial Market" and "Explain any four Instruments of Money Market" are the two most important 4-mark brief questions from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 11: Financial Market. In the HSC Board Examination, at least one of these two questions regularly appears in Question 5 (Answer in Brief - 4 Marks), Question 2 (Explain the Terms - 2 Marks), or Question 6 (Justify Statements - 4 Marks). Below are the complete, textbook-accurate solutions for both questions strictly aligned with the latest Balbharati Textbook.

Board Examiner Marking Scheme (4 Marks):
1. Meaning of Financial Market / Money Market: 1 Mark
2. Any 4 to 5 Functions OR Money Market Instruments with Explanation: 3 Marks
Topper's Tip: When explaining Money Market Instruments, always state the Issuer, Maturity Period, and Minimum Denomination (Face Value) to score a guaranteed 4 out of 4!

Part A: Meaning & Functions of Financial Market

1. Meaning of Financial Market

A Financial Market is a market where Financial Assets (Financial Instruments) such as shares, debentures, bonds, derivatives, commercial papers, treasury bills, etc. are exchanged or bought and sold. Financial markets attract funds from investors and channelize them to corporations. Thus, a Financial Market acts as an intermediary link between Savers (Investors / Lenders) who have surplus funds and Borrowers (Business Firms / Government) who need funds for productive investment. It consists of two distinct segments:

(a) Money Market: Market for short-term funds having a maturity period of one year or less.
(b) Capital Market: Market for medium-term and long-term funds having a maturity period of more than one year.

2. Functions of Financial Market (9 Official Textbook Points)

(Write any 4 to 6 points in the exam for 4 Marks):

Transfer of Resources: Financial Market facilitates the smooth transfer of real economic resources (funds) from lenders (ultimate savers) to ultimate users (borrowers / business entrepreneurs).
Productive Usage: Financial Market allows excess funds held by investors to be productively used by business corporations rather than lying idle with individuals. Borrowers use these funds to invest in productive assets and generate wealth.
Enhancing Income: Financial Market allows lenders (investors) to earn interest or dividend on their surplus invisible funds, thus leading to the enhancement of both individual income and the national income.
Capital Formation: Financial Market provides a channel through which small savings of thousands of investors flow to industrial and commercial organizations. This mobilization of savings aids in capital formation (creation of real capital assets) in the country.
Price Determination (Price Discovery): The financial instruments traded in a financial market get their prices determined by the mechanism of demand and supply. The investors are the suppliers of the funds and the corporates are the users; the interaction between these two market forces as well as other market factors helps to establish fair prices for securities.
Sale Mechanism (Liquidity): Financial Market provides a ready mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets (allowing investors to convert securities into cash quickly whenever needed).
Mobilizing Funds: Idle savings in the hands of the public are linked and mobilized by the financial market and utilized by corporates efficiently for economic growth.
Liquidity: Financial market provides a mechanism for liquidating the financial instruments. This means at any given time the investor can sell their financial instruments and convert them into cash. This is an important factor for investors who do not want to invest for a long period.
Easy Access & Industrial Development: Both investors and industries need each other. The financial market provides a common platform where both the buyers and sellers can find each other easily without spending too much time and money. Furthermore, by transforming savings into capital, it accelerates industrial and economic development.

Part B: Instruments of Money Market

1. Meaning of Money Market

The Money Market is a market for lending and borrowing of funds for a short term—varying from one day up to one year. The financial instruments traded in this market are close substitutes for money ("near-money" assets) and can be easily and quickly converted into cash without any loss of value and at very low transaction cost. In India, the Money Market is regulated by the Reserve Bank of India (RBI).

2. Quick Summary Table: 6 Instruments of Money Market

Sr. No.	Money Market Instrument	Issued By Whom	Maturity Period	Minimum Value / Multiples
1.	Call Money & Notice Money	Borrowed & lent between Commercial Banks	• Call: 1 Day • Notice: 2 to 14 Days	Inter-Bank Short-Term Liquidity Market
2.	Treasury Bills (T-Bills)	RBI on behalf of Central Government	91 Days, 182 Days, and 364 Days	Min. Rs. 25,000/- and in multiples of Rs. 25,000
3.	Trade Bills / Commercial Bills	Drawn by Seller of goods on Buyer	Generally 90 Days	Discounted with Commercial Banks
4.	Commercial Paper (CP)	Highly rated Companies, All-India FIs & Primary Dealers	Min. 7 Days to Max. 1 Year	Min. Rs. 5 Lakhs and in multiples of Rs. 5 Lakhs
5.	Certificate of Deposit (CD)	Commercial Banks & Financial Institutions	Min. 7 Days to Max. 1 Year (Up to 3 yrs by FIs)	Min. Rs. 1 Lakh and in multiples of Rs. 1 Lakh
6.	Government Securities	Central, State & Local Self-Governments	Short-term marketable debt	100% Safe "Gilt-Edged" Securities

3. Detailed Explanation of Money Market Instruments

1. Call Money and Notice Money

Call Money and Notice Money are an important segment of the money market in India:

Call Money: Under Call Money, funds are borrowed or lent for very short periods—one day (overnight). It is repayable on demand.
Notice Money: Under Notice Money, funds are borrowed or lent for periods between 2 days to 14 days. Funds have to be repaid within a specified time on the receipt of notice given by the lender.
Inter-Bank Market: When one bank faces a temporary shortage of cash (to maintain CRR), then another bank with surplus cash lends money to it. Hence, Call/Notice Money Market is also called the "Inter-Bank Call Money Market".

2. Treasury Bills (T-Bills)

Treasury Bills are short-term securities issued by the Reserve Bank of India (RBI) on behalf of the Central Government of India to meet the government's short-term funds requirements.

Three Maturity Periods: Treasury Bills have three maturity periods—91 days, 182 days, and 364 days.
Minimum Value: These bills are sold to banks, individuals, firms, institutions, etc., and are freely negotiable instruments. The minimum value of T-Bills is Rs. 25,000/- or in multiples of Rs. 25,000/-.
Zero Coupon Bonds: T-Bills do not carry an explicit rate of interest. Instead, they are issued at a discount and repaid at par (face value) on maturity, and hence they are also called "Zero Coupon Bonds".

3. Trade Bills / Commercial Bills

Bills of Exchange, also called Trade Bills, are negotiable instruments or bills drawn by a seller (drawer) on the buyer (drawee) for the value of goods sold under credit sales.

Maturity & Discounting: These have a short-term maturity period generally of 90 days and can be easily transferred. If the seller wants immediate cash, he can discount the Trade Bill with a Commercial Bank before maturity.
Commercial Bill: When a Trade Bill is accepted by a Commercial Bank, it is known as a "Commercial Bill". Banks can also re-discount these bills in the money market.

4. Commercial Paper (CP)

Commercial Paper (CP) is an unsecured promissory note issued by highly rated corporate companies, All-India Financial Institutions (like SIDBI, EXIM Bank), and Primary Dealers.

Maturity Period: It has a fixed maturity period ranging from a minimum of 7 days to a maximum of 1 year from the date of issue.
Minimum Value & Return: The minimum value of CP is Rs. 5 Lakhs or in multiples of Rs. 5 Lakhs. It is issued at a discount to face value and offers a higher return than Treasury Bills. Individuals, banks, mutual funds, and companies can invest in Commercial Papers.

5. Certificate of Deposit (CD)

Certificates of Deposit (CDs) are unsecured, negotiable promissory notes usually issued by Commercial Banks and Financial Institutions.

Meaning & Minimum Value: It is a bearer receipt of funds deposited in a bank for a fixed period at a specified rate of interest. It can be issued for a minimum value of Rs. 1 Lakh or in multiples of Rs. 1 Lakh.
Maturity Period: They are issued at a discount to face value (or at a fixed interest rate) and have a maturity period ranging from a minimum of 7 days to a maximum of 1 year (maximum 3 years if issued by Financial Institutions).

6. Government Securities

The marketable debt issued by the government or by semi-government bodies which represent a claim on the government is known as Government Securities. These securities are issued by agencies such as the Central Government, State Government, and local self-government bodies (municipalities, etc.). These securities are a 100% safe investment (Gilt-Edged Securities) as payment of interest and repayment of principal amount are guaranteed by the government.

Quick Memory Trick to Remember in the Exam

Memory Shortcut for 6 Money Market Instruments ("CT-TC-CG"):
1. Call / Notice Money (1 day / 2 to 14 days — Inter-bank)
2. Treasury Bills (91, 182, 364 days — Min. Rs. 25,000 — Zero Coupon Bonds)
3. Trade / Commercial Bills (Generally 90 days — Credit sales)
4. Commercial Paper (CP) (7 days to 1 year — Min. Rs. 5 Lakhs — Issued by Companies)
5. Certificate of Deposit (CD) (7 days to 1 year — Min. Rs. 1 Lakh — Issued by Banks)
6. Government Securities (Safe marketable debt issued by Govt.)