Q No 1" What is money market? Briefly explain the major money market instruments. (10 Marks)
(a) Treasury Bills (T Bills): Treasury Bill is a money market instrument which is issued by the Government of the country. Treasury bill is issued as a promissory note with a feature of repayment in the future. The purpose of a treasury note is to secure funds to meet the short-term fund requirements of the government of the nation. Treasury bill is one of the popular money market instruments which is issued on a discount yield basis. The maturity of the T Bill ranges generally from 91 days to 364 days.
(b) Commercial Paper: Commercial paper is an unsecured promissory notes, short-term debt instrument issued by large and corporations. It's generally used to finance short-term liabilities such as accounts payable, bills payable etc. Commercial paper is usually issued at a discount from face value with a promised future payment. Commercial paper are issued on utmost good faith and no collateral is attached to the Commercial paper.
(c) Banker's Acceptance: Banker's acceptance is a form of payment that is guaranteed by a bank rather than an individual account holder. Under the banker's acceptance, the bank guarantees the payment to the receiver at a later time in future. Banker's acceptance are most frequently used in international trade. Banker's acceptance helps to finalize transactions with relatively little risk to both buyer and supplier. Banker's acceptance is also known as Letter of Credit (LC).
In international trade, buyer and supplier lives in two different countries. The buyer needs a security and do not want to send advance payment before the goods are imported. At the same time, supplier also needs security and do not want to dispatch goods before payment is received or unless any kind of third party's strong guarantee is received. In such situation, banker's acceptance play a very vital role. Through the bank guarantee both the buyer and supplier of goods become secured.
(d) Certificate of Deposits (CD): Certificate of deposit (CD) is a kind of savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years etc. The issuing bank of the CD pays interest at a fixed rate. At the end of the period, the depositor receives the money originally invested plus any interest amount. Hence CDs are interest bearing instruments and the interest is added to the given principal amount
(e) Repurchase Agreement (Repo): A repurchase agreement is a contractual arrangement between two parties, where one party agrees to sell securities to another party at a specified price with a commitment to buy the securities back at future date for another (usually higher) specified price. The difference between the sale and purchase price is the interest rate. In practice, repurchase agreement is for one day and is called overnight repos.
Q No 2: What is financial market? How do you classify financial market? (10 Marks)
Ans: Financial markets broadly refer to any marketplace where the trading of securities occurs. Financial markets broadly include the stock market, bond market, forex market, derivatives market, and so many others. Financial markets are vital to the smooth operation of capitalist economies. In fact, there is not any hard and fast rule to classify the financial markets. For the convenience and easy to understand financial markets may be classified as under.
(a) Primary market: Securities are issued for the first time in the primary market. When security is issued for the first time to raise fund, then it is called IPO. Share issuing Company and the investors are the participants in the primary market.
(b) Secondary market: Secondary market is the market for existing outstanding securities. Securities are bought and sold among investors and investors. Company is not involved in the secondary market. No new fund is infused in the secondary markets, rather there is only changing hands from one investor to the another investor.
(c) Money market: Money market is a financial market wherein short-term securities and open-ended funds are traded between institutions and traders. The market offers very high liquidity as the securities can easily be converted into cash. Thus, it helps businesses and the government in meeting their working capital requirements.
(d) Capital Market: Capital market is a financial market where a long-term debt (over a year) or equity-backed securities are bought and sold. Capital markets channel the wealth of long-term investors (savers) to those who can put it to a long-term productive use, such as companies or governments making long-term investments.
(e) Derivatives market: Derivatives are a kind of financial contracts whose value is linked to the value of underlying asset/properties. Derivatives are complex financial instruments that are used for various purposes, including speculation, hedging and getting access to additional assets or markets.
Q No 3: What are major difference between central bank and commercial bank (10 Marks)
Ans: Banks play an important role in the economic development of a nation. Banks are an important part of the economy of a nation. Banks are the most critical institutions that help in regulating the economic development of a nation as a whole
Based on the authority, there are two types of banks. They are central banks and commercial banks. Central bank can be called the apex bank, which is responsible for formulating the monetary policy and fiscal policy of an economy
(a) Definition: Central bank is the apex financial institution of the country that is concerned with formation of monetary policies and the way money should be regulated in the economy
Commercial banks are a type of financial institution that is concerned with providing banking services to the general public and businesses by facilitating deposit, offering loan facilities, etc
(b) Ownership: Central bank is a government bank. It is always having public ownership. Commercial banks can be having public ownership or private ownership or a mixture of both
(c) Number of banks: There is only one central bank in a country, whereas there are many commercial banks in a country
(d) Profit motive: Central bank is not operated with profit motive. Commercial banks are operated with the motive of earning profit
(e) Clients: Government and commercial banks are clients for a central bank. Business organizations and general public are the clients for commercial banks
(f) Policy Creator: Central bank creates monitory policy and fiscal policy. Commercial banks do not create these policies, rather commercial banks implements and follows the policies
(g) Source of money supply: Central bank is the source of money supply in the economy. Commercial banks run on the deposits obtained from the individuals. Commercial banks do not perform any such function
Q No 4: Briefly explain the process of issuing securities in context of Nepal (5 Marks)
Ans: There are two types of financial market, i.e. Primary market and secondary market. In the primary market, securities are directly issued by companies to investors. In the context of Nepal, Securities are issued by an Initial Public Offer (IPO). An IPO is the process through which a company offers equity to investors. The securities issued by an IPO are available for trading by individuals and institutions.
Following are some of the ways how companies raise funds from the primary market.
(a) Public Issue: It is the most common way to issue securities to the general public. Through an IPO, the company is able to raise funds. The securities are listed on a stock exchange for trading purposes.
(b) Rights Issue: If a company wants to raise more capital from existing shareholders, it may offer the existing shareholders more shares at a discounted price in comparison to the prevailing market price. The number of shares is offered on a pro-rata basis. This kind of process is known as a Right Issue
(c) Preferential allotment: As a special case, when a listed company issues shares to a few individuals or institutions at a price that may or may not be related to the market price, such kind of share issue is termed a preferential allotment. The company decides the basis of allotment at its own. The allotment processis not dependent on any mechanism such as pro-rata or anything
Q No 5: Explain the role of financial market in economic development (5 Marks)
Ans: Financial markets play a very important role in facilitating the smooth operation of the nation's economies by allocating resources and creating liquidity for businesses and entrepreneurs. Financial markets refer broadly to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, and such others. The role of the financial market is as follows.
(a) Insure a low cost transactions and informatiuon
(b) Ensure liquidity by providing a mechanism for an investor to sell the financial assets
(c) Provides facilities for interaction between the investors and the borrowers
Q No 6: Describe the important role of investment bankers play in the functioning of the primary market in Nepal (5 Marks)
Ans: Issuing stocks and bonds is one of the primary ways for a company to raise capital. Issuing stock and bonds need special expertise. That’s why an investment bank usually comes into the picture.
Investment banks are a bridge between large enterprises and the investor. Investment banker provide advise to businesses and governments on how to meet their financial challenges and also help them to procure financing. In other words, investment bankers provide their services in stock offerings, bond issues, or derivative or any other financial products.
Following are some of the role of investment bankers
(a) Role as advisor
(b) Underwriting stock and bonds
(c) Other services like Assets management, Wealth management, Research, Trading & Sales
Q No 7: What is central bank? Central bank is the bank of banks and last resort of banks. Explain (5 Marks)
Ans: A central bank is a public institution that is responsible for implementing monetary policy, managing the currency of a country and controlling the money supply. In other words, It is national bank that provides financial and banking services for its country's government and commercial banking system, as well as implementing the government's monetary policy and issuing currency.
Q No 8: What are major types of insurance company ?(5 Marks)
Ans: Insurance company provides security in business and individuals. Following are the major types of insurance companies.
(a) Life Insurance
(b) Accident, Disability and Health Insurance
(c) Property and casualty Insurance
(d) Automobile Insurance
Q No 9: What term structure of interest rate mean? (5 Marks)
Ans: Term structure of interest rates is the relationship between interest rates (bond yields) and different maturities (term of maturity periods). When the relations are plotted in graph, the term structure of interest rates is known as a yield curve. It plays a important role in identifying the current state of an economy.
The term structure of interest rates reflects the expectations of market participants about future changes in interest rates and their assessment of monetary policy conditions. This is important as it is a gauge of the debt market's feeling about risk. One commonly used yield curve compares the three-month, two-year, five-year, 10-year, and 30-year Treasury debt.
Q No 10: Briefly explain the capital market instruments (5 Marks)
Ans: Capital market instruments are securities that are used by a company or government entity to raise money for long-term goals. The capital market deals with long-term securities, whereas the money market deals with short-term investments.
Some of the long-term instruments consist of Shares or Stocks, bonds, debentures, and long-term loans provided by financial institutions. Capital market enables the transfer of funds from a surplus unit to those in need of capital. Capital market also promotes investments and savings, and facilitates overall balanced economic growth.
There are two types of capital markets. They are primary and secondary markets. The primary market (also known as new issues market) help raising funds typically through an initial public offering (IPO). The secondary market is the market where old debt/stocks are traded between the investors.
Q No 11: Discuss briefly role of financial sector in the growth of national economy (5 Marks)
Ans: As answer of Q No 5
Q No 12: Explain various steps of issuing securities (5 Marks)
Ans: Issue of Shares is the process by which companies pass on new shares to shareholders, who can be either individuals or corporates. Issuing companies generally appoint an investment company (generally investment bankers) for the whole management of securities. While acquiring the shares, companies follow the rules prescribed by the Nepal Company Act 2063 BS.
There are 3 basic steps of the procedure of issuing the shares.
1. Issue of Prospectus
2. Receiving Applications
3. Allotment of Shares
Q No 13: What are the major types of Life Insurance Policies (5 Marks)
Ans: Following are the major types of life Insurance Policies.
(a) Whole life insurance policy
(b) Term life insurance policy
(c) Universal life insurance policy
(d) Fixed period life annuity policy
(e) Group Life insurance policy
Q No 14: SHORT Questions and Answers ( 1 mark each)
(a) What is investment banker: An investment banker is that who often works as part of a financial institution and is primarily concerned with raising capital for corporations and government, and arranging mergers and acquisitions.
(b) What is forward rate: A forward rate is the interest rate that will be paid on a loan or investment made in the future
(c) What is Liquidity: Liquidity refers to how much cash is readily available, or how quickly something can be converted into cash.
(d) What is expectation theory: It is a theory of interest rate which suggest that the interest rate of long-term bond tends to be equal to the average interest rate of short-term bond which are expected to be hold for a long-term period.
(e) What is yield curve: Yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but for different maturity dates.
(f) Monetary Policy: Monetary policy is a set of tools enforced by a central bank to control the overall money supply and promote economic growth in the country
(g) What is monetary market: Money market is a set of institutions, conventions, and practices that aim to facilitate the lending and borrowing of money on a short-term basis
(h) IPO: It stands for Initial Public Offering. It refers to the process of offering shares of a private corporation to the public in a new stock issuance for the first time.
(i) Treasury Bill: Treasury Bills (also known as T-bills) are the short-term money market instrument, issued by the central bank on behalf of the government with a purpose of addressing the temporary liquidity shortfalls
(j) What is spot rate: Spot rates are the prices of physical or financial assets in a transaction for immediate settlement.
(k) What is Provision for Loan Loss (PLL) or Loan Loss Provision (LLP): Loan loss provision is a cash reserve that banks set aside to cover expected future losses incurred from defaulted loans.
(l) What is interest rate risk: Interest rate risk is the risk associated with interest rate fluctuations in assets in future.
(m) What do you mean Assets Utilization ratio: Asset utilization ratio is a measure that how efficiently the firm uses its asset to generate sales revenue to reach a sufficient profitability level.
(n) What is Term Life Insurance: Term Life Insurance (also called temporary life insurance policy) in that type of insurance policy which is required to be renewed annually.
(o) What is nominal interest rate: The Nominal Interest rate refers to the interest rate without the adjustment of inflation
(p) What is central bank: Central bank is an independent national authority that conducts monetary policy, regulates banks, and provides financial services
(q) Financial assets: In simple words, Financial assets can be defined as an investment asset are liquid assets which can be converted into matter, such as cash.
(r) Life Insurance Company: Life insurance company is a non-depository financial institution which sells the life insurance policy
(s) Primary market: A primary market is a source of new securities where company offers securities for sale to investors.
(t) Financial system: Financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors, and borrowers.
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