20 extra multiple-choice questions for Introduction to Financial Markets (12th Standard Commerce, Samacheer Kalvi), beyond the ones printed in the textbook — each with the correct option highlighted and a clear, worked explanation. Free to read in English and Tamil.
Q1
Who defined a financial market as "the place where people and organizations wanting to borrow money are brought together with those having surplus funds"?
- A. Henry Fayol
- B. Brigham, Eugene FCorrect
- C. F.W. Taylor
- D. Peter F. Drucker
Explanation. Section 4.01 quotes Brigham, Eugene F, who described the financial market as the place where borrowers of money are brought together with those having surplus funds.
Q2
Which one of the following belongs to the unorganized sector of the Indian financial system?
- A. Regulators
- B. Financial Institutions
- C. Indigenous BankersCorrect
- D. Financial Services
Explanation. The organized sector consists of regulators, financial institutions, financial markets and financial services. The unorganized sector consists of money lenders and indigenous bankers.
Q3
Which of the following is an example of a money market instrument?
- A. Equity shares
- B. Treasury BillsCorrect
- C. Debentures
- D. Preference shares
Explanation. The money market deals in short term claims of usually one year or less, such as Treasury Bills, Commercial Paper and Certificates of Deposit. Shares and debentures are capital market instruments.
Q4
On the basis of the type of financial claim, the market for trading in Government Bonds and Corporate Debentures is called the
- A. Equity Market
- B. Debt MarketCorrect
- C. Spot Market
- D. Over-the-Counter Market
Explanation. The debt market trades debt instruments such as government bonds or securities and corporate debentures or bonds, while the equity market trades the equity shares of companies.
Q5
Consider the following statements about the primary market:
1) It includes all institutions involved in the sale of securities for the first time by the issuers.
2) The money from investors goes directly to the issuers.
3) The stock exchange is its most important institution.
Which of the statements given above is/are correct?
- A. 1 only
- B. 1 and 2 onlyCorrect
- C. 2 and 3 only
- D. 1, 2 and 3
Explanation. Statements 1 and 2 describe the primary market. The stock exchange is an important institution of the secondary market, where already issued securities are traded, so statement 3 is wrong.
Q6
A decentralized market, outside the stock exchange, with customized procedures is known as the
- A. Exchange Traded Market
- B. Over-the-Counter MarketCorrect
- C. Primary Market
- D. Cash Market
Explanation. On the basis of organizational structure, the Over-the-Counter market is decentralized and customized, while the Exchange Traded market is a centralized organization (stock exchange) with standardized procedures.
Q7
In which market do the delivery of the asset and the payment of cash take place at a pre-determined time frame in the future?
- A. Cash market
- B. Spot market
- C. Forward or Futures marketCorrect
- D. Equity market
Explanation. Classified by timing of delivery, the forward or futures market settles at a pre-determined future time, whereas in the cash or spot market delivery and payment occur immediately.
Q8
Match the basis of classification with the pair of markets:
A) Type of financial claim - 1) Money market and Capital market
B) Maturity of financial claim - 2) Cash market and Futures market
C) Time of issue of financial claim - 3) Debt market and Equity market
D) Timing of delivery of financial claim - 4) Primary market and Secondary market
- A. A-3, B-1, C-4, D-2Correct
- B. A-1, B-3, C-2, D-4
- C. A-3, B-4, C-1, D-2
- D. A-4, B-1, C-3, D-2
Explanation. Section 4.03 classifies debt and equity markets by type of claim, money and capital markets by maturity, primary and secondary markets by time of issue, and cash and futures markets by timing of delivery.
Q9
Assertion (A): One financial market may come under more than one category.
Reason (R): The classification of financial markets is not rigid.
- A. Both A and R are true and R is the correct explanation of ACorrect
- B. Both A and R are true but R is not the correct explanation of A
- C. A is true but R is false
- D. A is false but R is true
Explanation. After listing the five bases of classification, the book notes that the classification is not rigid, and that is exactly why one market may fall under more than one category.
Q10
Obtaining funds from surplus units such as household individuals, business firms, public sector units and Government is the role of financial markets known as
- A. Savings MobilizationCorrect
- B. Investment
- C. Industrial Development
- D. Entrepreneurship Growth
Explanation. Under the role of financial markets, savings mobilization means obtaining funds from savers or surplus units such as households, firms, public sector units and Government.
Q11
Financial markets contribute to a nation's growth by ensuring an unfettered flow of surplus funds to deficit units. This role is called
- A. Savings Mobilization
- B. National GrowthCorrect
- C. Entrepreneurship Growth
- D. Capital Formation
Explanation. The role 'National Growth' describes the unfettered flow of surplus funds to deficit units for productive purposes, which leads to overall economic growth of the nation.
Q12
Financial markets contribute to the development of the entrepreneurial class by
- A. Fixing the price of goods
- B. Making available the necessary financial resourcesCorrect
- C. Recruiting skilled workers for them
- D. Reducing the tax on their income
Explanation. Under Entrepreneurship Growth, the book says financial markets develop the entrepreneurial class by making available the necessary financial resources.
Q13
Which intermediary function of financial markets provides a channel through which new savings flow to aid the capital formation of a country?
- A. Transfer of Resources
- B. Enhancing Income
- C. Capital FormationCorrect
- D. Sale Mechanism
Explanation. The capital formation function means financial markets provide a channel for new savings to flow into the capital formation of a country. Transfer of resources moves real resources from lenders to borrowers.
Q14
Financial markets determine the price of traded financial assets through the interaction of buyers and sellers. This mechanism is called
- A. Price discovery processCorrect
- B. Sale mechanism
- C. Productive usage
- D. Savings mobilization
Explanation. Under price determination, the interaction of buyers and sellers signals the allocation of funds on the basis of demand and supply through the mechanism called the price discovery process.
Q15
Which one of the following is a financial function, and not an intermediary function, of a financial market?
- A. Transfer of resources from lenders to ultimate borrowers
- B. Dissemination of information to the various segments of the market
- C. Providing liquidity in the market so as to facilitate trading of fundsCorrect
- D. Providing a mechanism for selling a financial asset
Explanation. The financial functions are providing borrowers with funds, providing lenders with earning assets and providing liquidity in the market. Transfer of resources, information and sale mechanism are intermediary functions.
Q16
The information function of financial markets helps to
- A. Reduce the cost of transaction of financial assetsCorrect
- B. Fix the price of new shares
- C. Increase the tax revenue of the Government
- D. Remove the need for intermediaries
Explanation. The activities of participants generate information and spread it to the various segments of the market, so as to reduce the cost of transaction of financial assets.
Q17
In the New Issue Market, the intermediaries are
- A. Brokers
- B. UnderwritersCorrect
- C. Money lenders
- D. Indigenous bankers
Explanation. The comparison table names underwriters as the intermediary in the New Issue Market and brokers as the intermediary in the Secondary Market.
Q18
Consider the following statements comparing the two markets:
1) In the New Issue Market securities are sold at a fixed price.
2) The Secondary Market has a physical existence.
3) The Secondary Market provides funds to companies for expansion and diversification.
Which of the statements given above is/are correct?
- A. 1 only
- B. 1 and 2 onlyCorrect
- C. 2 and 3 only
- D. 1, 2 and 3
Explanation. The table gives a fixed price for the New Issue Market and a physical existence for the Secondary Market. It is the New Issue Market that funds companies; the Secondary Market does not provide funding to companies.
Q19
Find the odd one out with respect to marketable assets.
- A. Shares of listed companies
- B. Government securities
- C. Bonds of public sector undertakings
- D. National Savings CertificatesCorrect
Explanation. Marketable assets can be transferred easily, such as listed shares, government securities and PSU bonds. National Savings Certificates cannot be transferred easily, so they are non-marketable assets.
Q20
According to the box on financial assets, a building bought for hiring becomes
- A. A physical asset
- B. A financial assetCorrect
- C. A non-marketable asset
- D. A consumption asset
Explanation. The objective of investment decides the nature of the asset. A building bought for residence is a physical asset, but the same building bought for hiring earns income and becomes a financial asset.
