Dear Class 12 Samacheer Kalvi students, here are the Chapter 5 – Capital Market Text Book Solutions in Commerce for your reference and study.
Click here for Commerce Text Book Solutions Lessons 1-28
I. Choose the Correct Answers:
| 1. Capital market do not provide: | |
| a) Short-term Funds | |
| b) Debenture Funds | |
| c) Equity Funds | |
| d) Long-term Funds | |
| 2. When was the NSEI established? | |
| a) 1990 | |
| b) 1992 | |
| c) 1998 | |
| d) 1997 | |
| 3. Primary market is a Market where securities are traded: | |
| a) First Time | |
| b) Second Time | |
| c) Three Times | |
| d) Several Times | |
| 4. Participants in the Capital Market include: | |
| a) Individuals | |
| b) Corporate | |
| c) Financial Institutions | |
| d) All of the above | |
| 5. The _______ was set up by a premier financial institution to allow the trading of securities across the electronic counters throughout the country. | |
| a) OTCEI | |
| b) Factoring | |
| c) Mutual Funds | |
| d) Venture Funds Institutions |
II. Very Short Answer Questions:
1. What is Capital Market?
Answer: Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, and stocks. The buying/selling is done by individuals and institutions.
2. Write a note on OTCEI.
Answer: The OTCEI was set up by a premier financial institution to allow the trading of securities across the electronic counters throughout the country. It addresses some specific problems of both investors and medium-size companies. OTCEI’s strengths include:
- transparency of transactions
- quick deals
- faster settlements; and
- better liquidity.
3. Who are the participants in a Capital Market?
Answer: The participants of the capital market include individuals, corporate sectors, Govt., banks and other financial institutions.
4. How is price determined in a Capital Market?
Answer: The price in a Capital Market is determined based on the demand and supply force, through the mechanism called price discovery processes.
III. Short Answer Questions:
1. What are the various kinds of Capital Market? Explain (any 3)
Answer: The capital market is divided into two i.e., primary market and secondary market.
Primary Market : This is a market for new issues or new financial claims. Hence, it is also called New Issue Market. It deals with those securities which are issued to the public for the first time. In this market, borrowers exchange new financial securities for long term funds. Thus, it facilitates capital formations.
There are three ways by which a company may raise capital in a primary market. They are:
- (i) Public Issue: The most common method of raising capital by new companies is through sale of securities to the public. It is called public issue.
- (ii) Rights Issue: When an existing company wants to raise additional capital, securities are first offered to the existing shareholders on a pre-emptive basis. It is called rights issue.
- (iii) Private Placement: Private placement is a way of selling securities privately to a small group of investors.
Secondary Market: Secondary Market may be defined as the market for old securities. Securities which were previously issued in the primary market are traded here. It covers both stock exchange and over-the counter market.
2. Explain any two functions of Capital Market.
Answer: Two functions of the Capital market include:
(1) Ready and Continuous Market
The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. Easy marketability makes investment in securities more liquid as compared to other assets.
(2) Reliable Guide to Performance
The capital market serves as a reliable guide to the performance and financial position of corporates, thereby promoting efficiency.
3. Explain about Factoring and Venture Capital Institutions.
Answer: Factoring and Venture Capital Institutions are some of the financial institutions established to cater to the credit requirements of various segments of industry.
Factoring Institutions
Factoring is an arrangement whereby a financial institution provides financial accommodation on the basis of sale of account receivables. The factoring institutions collect the book debts for and on behalf of its clients. Example: SBI Factors and Commercial Services Private Limited, a subsidiary of State Bank of India and Canbank Factors Limited, a subsidiary of Canara Bank.
Venture Fund Institutions
Venture capital financing is a form of equity financing for funding new and innovative project ideas. Venture capital funds bring into force the hi-technology projects which are converted into commercial production. Many specialized financial institutions have promoted their own venture capital funds. They include Risk Capital Foundation of IFCI, Venture Fund of IDBI, SIDBI, Technology Development and Infrastructure Corporation of India (TDICI).
IV. Long Answer Questions:
1. Discuss the characters of a Capital Market.
Answer: Following are the characteristics of a capital market:
(i) Securities Market
The dealings in a capital market are done through securities like shares, debentures, etc. The capital market is thus called securities market.
(ii) Price
The price of the securities is determined based on the demand and supply prevailing in the capital market for securities.
(iii) Participants
There are many players in the capital market. The participants of the capital market include individuals, corporate sectors, Govt., banks and other financial institutions.
(iv) Location
Capital market is not confined to certain specific locations, but parts of the market are concentrated in certain well-known centers known as Stock Exchanges. It has its impact in the overall economy, wherever suppliers and users of capital get together and do business.
(v) Market for Financial Assets
Capital market provides a transaction platform for long term financial assets.
2. Briefly explain the functions of Capital Market. (any 5)
Answer: Functions of the Capital Market include the following:
(1) Industrial Growth
The stock exchange is a central market through which resources are transferred to the industrial sector of the economy. The existence of such an institution encourages people to invest in productive channels. Thus it stimulates industrial growth and economic development of the country by mobilizing funds for investment in corporate securities.
(2) Ready and Continuous Market
The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. Easy marketability makes investment in securities more liquid as compared to other assets.
(3) Reliable Guide to Performance
The capital market serves as a reliable guide to the performance and financial position of corporates, thereby promoting efficiency.
(4) Provision of Variety of Services
Financial institutions in the capital market provide a variety of services such as grant of long term and medium term loans to entrepreneurs, provision of underwriting facilities, assistance in promotion of companies, participation in equity capital, giving expert advice etc.
(5) Development of Backward Areas
Capital Markets provide funds for projects in backward areas. This facilitates economic development of backward areas. Long term funds are also provided for development projects in backward and rural areas.
3. Explain the various types of New Financial Institutions. (any 5)
Answer: Various types of New Financial Institutions include:
Factoring Institutions
Factoring is an arrangement whereby a financial institution provides financial accommodation on the basis of sale of account receivables. The factoring institutions collect the book debts for and on behalf of its clients. Example: SBI Factors and Commercial Services Private Limited, a subsidiary of State Bank of India and Canbank Factors Limited, a subsidiary of Canara Bank.
Venture Fund Institutions
Venture capital financing is a form of equity financing for funding new and innovative project ideas. Venture capital funds bring into force the hi-technology projects which are converted into commercial production. Many specialized financial institutions have promoted their own venture capital funds. They include Risk Capital Foundation of IFCI, Venture Fund of IDBI, SIDBI, Technology Development and Infrastructure Corporation of India (TDICI).
Mutual Funds
Financial institutions that channel savings of small investors into areas of productive investments are called ‘Mutual Funds’. A mutual fund company invests the funds pooled from shareholders and gives them the benefit of diversified investment portfolio and a reasonable return. Specialized financial institutions like LIC, UTI, commercial banks such as SBI, and Canara Bank are carrying out the business of mutual funds. The benefits of mutual fund are high return, easy liquidity, safety and tax benefits to the investors.
(4) Over the Counter Exchange of India (OTCEI)
The OTCEI was set up by a premier financial institution to allow the trading of securities across the electronic counters throughout the country. It addresses some specific problems of both investors and medium-size companies. OTCEI’s strengths are transparency of transactions, quick deals, faster settlements and better liquidity.
(5) National Stock Exchange of India Limited (NSEI)
NSEI was established in 1992 to function as a model stock exchange. The Exchange aims at providing the advantage of nation-wide electronic screen based “scripless” and “floorless” trading system in securities. The institution allows for an efficient and transparent system of securities trading.
If you have any questions on this topic, please let us know in the comments section.
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