Financial Markets and Instruments
This domain tests how savings move from surplus units to deficit units, the instruments used, and which regulator governs each market segment.
Market structure
The primary market issues new securities (IPO, FPO, rights issue, private placement); the secondary market trades existing securities on exchanges such as NSE and BSE. The money market handles short-term funds up to one year - call money (1 day), Treasury bills (91, 182, 364 days), commercial paper (unsecured, by corporates), certificates of deposit (by banks) and commercial bills. The capital market handles long-term funds - equity shares, preference shares, debentures, bonds and mutual fund units. RBI regulates the money market; SEBI regulates the capital market under the SEBI Act, 1992. Depositories NSDL and CDSL hold securities in dematerialised form, and equities settle on a T+1 basis.
Worked example
A 91-day Treasury bill with face value ₹100 is bought at ₹98.50. Yield = [(100 − 98.50) ÷ 98.50] × (365 ÷ 91) × 100 = (1.50 ÷ 98.50) × 4.011 × 100 = 6.11% p.a. Reasoning: T-bills are issued at a discount and redeemed at face value, so the return is the discount annualised over the holding period - not a coupon.
Traps
Calling a T-bill a coupon-bearing bond; confusing commercial paper (corporate) with certificates of deposit (bank); assigning SEBI to the money market; and treating the primary market as a place where securities are resold.