1.
CHAPTER 10
Financial Market

2.
Financial system
Financial
instruments
Financial services
Financial institutions Financial markets

3.
FINANCIAL MARKETS
Financial markets facilitate buying and selling of
financial instruments or services.
It is a market for the creation and exchange of
financial assets such as shares, debentures, bonds
and Government securities.

4.
CONCEPT OF FINANCIAL MARKETS
 A business is part of an economic system
An economic system consists of two sectors, viz,
households and business firms
Households saves funds and business firms invest the
funds
Financial market act as an intermediary which makes
possible the transfer of funds from the savers to the
investors

5.
HOW ALLOCATION OF FUNDS WORKS?
House holds
Savers
Business firms
Investors
Banks
Financial Markets

6.
HOW ALLOCATION OF FUNDS WORKS?
There are two alternatives through which allocation of
funds can be done - Banks and financial markets
 Households can deposit their surplus funds with banks.
Banks lend these funds to business firms.
Households can also buy shares and debentures offered
by business through the financial markets.
The process of allocation of funds is known as financial
intermediation.

7.
FUNCTIONS OF FINANCIAL MARKET
Mobilises savings
Facilitating price discovery
Providing liquidity to financial assets
Reducing cost of transactions

8.
Mobilise savings
A financial market facilitates transfer of
savings from people to investors. It offers
the savers different investment avenues
and helps to channelise surplus funds into
productive use.

9.
Facilitating price discovery
Price of any product or service in a market is
determined by the forces of demand and
supply. Households are suppliers of funds and
business firms are the sources of demand

10.
Providing liquidity to financial
assets
Financial markets provide liquidity to financial
assets. This is possible because of the ease in
the purchase and sale of financial assets.

11.
Reducing the cost of transactions
Financial markets provide up-to-date and
valuable information about securities traded
in the market. So it saves time , effort and
money required to be spent by both buyers
and sellers to find out each other.

12.
Money Market
R.B.I. is the leader
• Money market is a market for short term funds,
which deals in monetary assets with period of
maturity up to 1 year
• Commercial banks & development Financial
Institutions are major players

13.
Fatures of Money Market
• Participants- RBI , Commercial Banks , NBFCs,
Mutual Funds and State governments
• Instruments – short term debt instruments
• Investment outlay –transactions entail huge
sum of money
• Duration - tenure of maximum one one year;
can be a single day
• Liquidity - Enjoy a high degree of liquidity

14.
Fatures of Money Market
• Safety – Short term duration of transactions
ensures greater safety
• Location – No physical location
• Returns – expected returns are less compared
to other markets
• Security- Instruments traded are unsecured

15.
SUB MARKETS OF INDIAN MONEY
MARKET
Call money market
Commercial bill market
Treasury bill market
Commercial paper
Certificate of deposit

16.
Call Money Market(CMM)
• Day-to-day surplus funds of banks and financial
institutions are dealt with
• Helps to maintain statutory reserve fixed by RBI
• Duration 1 day – 14 days
• Located in cities like Mumbai, Kolkata,
Ahmedabad, Chennai
• CMM functions from Monday to Friday

17.
Commercial bill market
• Market for bill of exchange
• Discounted bills are rediscounted in the
commercial bill market
• Provides short term liquidity to banks
• RBI,LIC,UTI,GIC,ECGC offer re-discount
facilities

18.
Treasury bill market
• Short-term borrowings made by
government
• Issued at a discount on face value &
repayable at par
• RBI issues T bills
• Issued on ‘On tap’ & ‘On auction” basis
• Duration 14 -364 days

19.
Commercial Paper(CP)
• Commercial Paper is a short term unsecured
promissory note, with a maturity period
ranging from 15 days to 270 days.
• CP is sold at a discount and redeemed at par.
• CP serve as an important source of working
capital

20.
Certificate of deposit(CD)
• A document of title issued by commercial
banks on deposits
• Traded in money market
• Introduced in 1989
• Minimum amount is Rs.1,00,000

21.
Features of CD’s
• Negotiable instruments
• Issued at a discount on the face value
• Period 3 months – 1 year
• Marketable after 45 days of issue
• Issuing banks are not allowed to buy back CD’s
before maturity