Question

These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed the most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded everyday. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.
(a) Name the function being performed by the market in the above case.
(b) Name the market segment other than the capital market segment in which unsecured and short-term debt instruments are traded. Also, give any three points of difference between the two.

Answer 1

(a) The function being performed by the market is the Allocative function.
(b) The market segment other than the capital market segment in which unsecured and short-term debt instruments are traded is called the Money Market. The three points of difference between the two are as follows:

Basis of difference	Capital Market	Money Market
Time span of Securities	It mainly deals in the trading of medium and long-term securities wherein the maturity period is more than one year.	It deals in the trading of short-term securities where in the maturity period can vary from one day to a maximum of one year
Liquidity	The securities traded are liquid in nature as they are tradable on stock exchanges. However, they are less liquid in comparison to the money market securities.	The securities traded are highly liquid in nature. This is because DFHI (Discount and Finace House of India) discounts money market securities and offers a ready market for them
Expected returns	Expected returns are higher due to the possibility of capital gains in the long term and regular dividends or bouns	Expected returns are lower due to shorter duration