Financial System and Markets: Institutions, Instruments, Money Market vs Capital Market (Overview) Questions

Question 1

Define financial system.

Accepted Answer

Financial system is the network of institutions, markets and instruments that links **savers** and **users of funds** (concept).

Question 2

What is a financial market?

Accepted Answer

A financial market is a platform where financial instruments are **issued and traded**, enabling fund transfer and price discovery.

Question 3

State one function of financial markets.

Accepted Answer

Financial markets provide **liquidity** (easy buying/selling) and help in price discovery (any one).

Question 4

What is money market?

Accepted Answer

Money market is the market for **short-term funds** and short-term instruments (concept).

Question 5

Primary market deals with new issue of securities. (True/False)

Accepted Answer

True. **Primary market** is where new securities are issued to raise fresh funds (concept).

Question 6

Give one example of a money market instrument (concept).

Accepted Answer

**Treasury bill** (or commercial paper/certificate of deposit) (concept).

Question 7

List components of a financial system (any three) using a table.

Accepted Answer

Components of a financial system:

| Component | Examples |
|---|---|
| **Institutions** | banks, insurance, mutual funds (concept) |
| **Markets** | money market, capital market |
| **Instruments** | shares, bonds, T-bills (concept) |
| Services | payments, settlement (concept) |

Any three components can be written in exams.

Question 8

Differentiate money market and capital market using a table (any three points).

Accepted Answer

Money market vs capital market:

| Basis | **Money market** | **Capital market** |
|---|---|---|
| Tenure | short-term (concept) | medium/long-term |
| Purpose | liquidity/working capital | capital formation/investment |
| Instruments | T-bills, CP, CD (concept) | shares, bonds/debentures (concept) |

Thus, money market is short-term; capital market is long-term.

Question 9

Differentiate primary market and secondary market using a table (any three points).

Accepted Answer

Primary vs secondary market:

| Basis | **Primary market** | **Secondary market** |
|---|---|---|
| Activity | new issue of securities | trading of existing securities |
| Funds go to | issuer/company/government | seller/investor |
| Purpose | raising capital | **liquidity** + price discovery |

Hence, primary creates securities; secondary provides liquidity.

Question 10

Explain functions of financial markets (any three) and add a simple flow.

Accepted Answer

Functions (any three):

- **mobilise savings** and allocate funds
- provide **liquidity** to investors
- enable **price discovery**
- help risk transfer/hedging (concept)

Flow: Saver → Market/Institution → Issuer/Investor → Returns back to saver

Question 11

Explain price discovery and liquidity in financial markets using a small table (brief).

Accepted Answer

Price discovery vs liquidity:

| Term | Meaning | Why important |
|---|---|---|
| **Price discovery** | market determines fair price of securities | guides investment decisions |
| **Liquidity** | ability to quickly buy/sell with low cost | makes markets attractive and efficient |

Thus, price discovery and liquidity are core functions of financial markets.

Question 12

Classify financial instruments into equity and debt and give examples using a table.

Accepted Answer

Classification of instruments:

| Category | Meaning | Examples (concept) |
|---|---|---|
| **Equity** | ownership claim | equity shares |
| **Debt** | repayment obligation | bonds/debentures, loans |

Thus, equity represents ownership, while debt represents borrowing.

Question 13

Explain financial institutions and their role in the financial system (exam-style) with a table and conclusion.

Accepted Answer

### Meaning
Financial institutions are intermediaries (banks, insurance, mutual funds etc.) that collect savings and provide credit/investment avenues (concept).

| Role | How it helps |
|---|---|
| **Intermediation** | channels savings to investment/credit |
| Services | payments, settlement, advisory (concept) |
| Risk sharing | pooling and diversification (concept) |

### Conclusion
Institutions make the financial system efficient by mobilising savings, improving access to funds, and supporting economic growth.

Question 14

Explain money market and capital market with examples of instruments (exam-style) using a table and conclude.

Accepted Answer

### Money market vs capital market

| Basis | **Money market** | **Capital market** |
|---|---|---|
| Tenure | short-term (concept) | long-term |
| Instruments | T-bills, CP, CD (concept) | shares, bonds/debentures (concept) |
| Main use | liquidity/working capital | capital formation |

### Conclusion
Money market supports short-term liquidity, while capital market finances long-term investment and growth.

Question 15

Write an exam-style answer explaining fund flow in primary and secondary markets with a flowchart and conclusion.

Accepted Answer

### Flowcharts
Primary market (new issue): Investors → **Issuer** (company/government) → funds used for projects

Secondary market (trading): Buyer investor → Seller investor (ownership transfers; issuer not directly funded in that trade)

| Market | Funds go to | Benefit |
|---|---|---|
| **Primary** | issuer | capital raising |
| **Secondary** | seller | **liquidity** + price discovery |

### Conclusion
Primary market creates new securities and funds the issuer, while secondary market provides liquidity and market pricing.

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Financial System and Markets: Institutions, Instruments, Money Market vs Capital Market (Overview)

8 more questions to unlock

Component	Examples
Institutions	banks, insurance, mutual funds (concept)
Markets	money market, capital market
Instruments	shares, bonds, T-bills (concept)
Services	payments, settlement (concept)