Financial Markets and Instruments
Financial Markets and Instruments
This domain tests how funds move from savers to issuers and how instruments are priced and traded. Expect money-market versus capital-market classifications, SEBI’s role, demat and IPO processes.
Core rules and concepts
- The primary market issues new securities; the secondary market trades existing securities.
- Money-market instruments mature within one year: Treasury bills, commercial paper, certificates of deposit and call money.
- Capital-market instruments include equity shares, preference shares, debentures and bonds.
- T-bills are issued at a discount and redeemed at face value; they pay no coupon.
- SEBI regulates securities markets; RBI regulates money markets and government securities.
- A demat account holds securities electronically; an IPO allotment is credited to it.
Worked example
A 91-day T-bill with face value ₹100 is issued at ₹98.50. The investor’s gain is ₹1.50. The discount yield is (1.50 ÷ 100) × (365 ÷ 91) × 100 ≈ 6.02%. Reasoning: the return is the discount divided by face value, annualised by 365/91. If the question asks for the yield on the issue price, the denominator changes to ₹98.50; read the wording before calculating.
Traps that cost marks
- Calling a T-bill a coupon-bearing bond.
- Mixing primary-market allotment with secondary-market trading.
- Treating preference shares as fixed deposits.
- Using 360 days when the question specifies 365, or reversing face value and issue price.