What are Treasury Bills?

Promissory notes issued by the Government for a specific period (91, 182, or 364 days), with high liquidity and low risk.

How does Money Market differ from Capital Market?

Money Market: short-term (up to 1 year), low risk, high liquidity, regulated by Central Bank. Capital Market: long-term (more than 1 year), high risk, low liquidity, regulated by Central Bank and SEBI.

Samacheer Kalvi 12th Commerce Chapter 6 Money Market Exercise Solutions

I. Choose the Correct Answer

Q1. Which of the following is a feature of the money market?

(a) High Profitability
(b) Low Profitability
(c) High Risk
(d) Long-term funds

Answer(b) Low Profitability — Money market instruments offer low returns because they are short-term and low-risk.

Q2. Which of the following is a part of the money market?

(a) Commercial Bank
(b) Stock Exchange
(c) Bond Market
(d) Mutual Fund

Answer(a) Commercial Bank — Commercial banks are key participants and intermediaries in the money market.

Q3. The money market deals with

(a) Long-term funds
(b) Short-term funds
(c) Medium-term funds
(d) Risk-free funds

Answer(b) Short-term funds — The money market exclusively deals with short-term financial assets with maturity up to one year.

Q4. The important components of the money market are

(a) Stock Exchanges and SEBI
(b) Commercial Banks and Discount Houses
(c) Mutual Funds and Insurance Companies
(d) None of the above

Answer(b) Commercial Banks and Discount Houses — These are the primary components that facilitate short-term borrowing and lending.

Q5. Money market instruments have

(a) High Profitability
(b) High Credit Risk
(c) Low Credit and Market Risk
(d) High Market Risk

Answer(c) Low Credit and Market Risk — Money market instruments are considered safe investments with minimal default risk.

Q6. Which of the following is a money market instrument?

(a) Equity Shares
(b) Commercial Paper
(c) Debentures
(d) Bonds

Answer(b) Commercial Paper — Commercial Paper is a short-term unsecured promissory note issued by corporations, a classic money market instrument.

Q7. The market for short-term instruments such as bills of exchange is called

(a) Treasury Bill Market
(b) Commercial Bill Market
(c) Certificate of Deposit Market
(d) Call Money Market

Answer(b) Commercial Bill Market — Bills of exchange are traded in the commercial bill market.

Q8. A certificate of deposit is issued by

(a) Government
(b) RBI
(c) Commercial Banks and Financial Institutions
(d) SEBI

Answer(c) Commercial Banks and Financial Institutions — CDs are negotiable instruments issued by scheduled commercial banks and select financial institutions.

Q9. Treasury Bills have

(a) High Liquidity
(b) Low Liquidity
(c) No Liquidity
(d) Medium Liquidity

Answer(a) High Liquidity — Treasury Bills are backed by the Government and are readily convertible into cash, making them highly liquid.

Q10. Money market is a market for

(a) Long-term funds
(b) Short-term funds
(c) Medium-term funds
(d) All of the above

Answer(d) All of the above — Note: The textbook answer is (d), but conceptually the money market deals exclusively with short-term funds (up to one year). The "All of the above" option likely refers to the various types of short-term instruments within the money market.

II. Choose the Correct Answer (Additional MCQs)

Q1. Money market deals with ________

(a) Short-term funds
(b) Long-term funds
(c) Medium-term funds
(d) None

Answer(a) Short-term funds

Q2. ________ deals with short-term financial assets

(a) Money Market
(b) Capital Market
(c) Stock Market
(d) Commodity Market

Answer(a) Money Market

Q3. The instruments of money market are

(a) Readily convertible
(b) Not convertible
(c) Partially convertible
(d) None

Answer(a) Readily convertible — Money market instruments are close substitutes for money and can be readily converted into cash.

Q4. Indigenous Bills are drawn according to

(a) Native custom
(b) Foreign custom
(c) Both native and foreign custom
(d) None

Answer(a) Native custom — Indigenous bills are drawn according to the customs and practices prevalent in the local region.

Q5. Find the odd one out

(a) Debtor
(b) Creditor
(c) Drawee
(d) Drawer

Answer(b) Creditor — Debtor, Drawee, and Drawer are all parties on the same side of a bill of exchange. Creditor is on the opposite side.

Q6. Choose the correct statement(s):

(i) Commercial banks deal in money market
(ii) Financial institutions deal in money market
(iii) Stock exchanges deal in money market
(iv) Both commercial banks and financial institutions deal in money market

(a) i only
(b) ii only
(c) i and iv
(d) iii only

Answer(c) i and iv — Both commercial banks and financial institutions are active participants in the money market.

III. Match the Following

Match Q1

	Column I		Column II
(i)	Treasury Bill Market	(1)	Short term Funds
(ii)	CD Market	(2)	Long term Funds
(iii)	Money Market	(3)	Higher degree of liquidity
(iv)	Capital Market	(4)	Issued by Commercial Banks

Answer

(i) — 3: Treasury Bill Market → Higher degree of liquidity
(ii) — 4: CD Market → Issued by Commercial Banks
(iii) — 1: Money Market → Short term Funds
(iv) — 2: Capital Market → Long term Funds

Match Q2

	Column I		Column II
(i)	Inland Bills	(1)	Documents attached
(ii)	Documentary Bills	(2)	No documents attached
(iii)	Clean Bills	(3)	Drawn in India
(iv)	Foreign Bills	(4)	Drawn outside India

Answer

(i) — 3: Inland Bills → Drawn in India
(ii) — 1: Documentary Bills → Documents attached
(iii) — 2: Clean Bills → No documents attached
(iv) — 4: Foreign Bills → Drawn outside India

IV. Assertion and Reason

Q1. Assertion (A): Treasury Bills have high liquidity. Reason (R): Government promises payment.

(a) Both A and R are true, R is the correct explanation of A
(b) Both A and R are true, R is not the correct explanation of A
(c) A is true but R is false
(d) A is false but R is true

Answer(a) Both A and R are true, and R is the correct explanation of A. Treasury Bills have high liquidity because the Government promises payment, making them virtually risk-free and readily convertible into cash.

Q2. Assertion (A): A demand bill has no specific time of payment. Reason (R): It is payable on demand.

(a) Both A and R are true, R is the correct explanation of A
(b) Both A and R are true, R is not the correct explanation of A
(c) A is true but R is false
(d) A is false but R is true

Answer(a) Both A and R are true, and R is the correct explanation of A. A demand bill has no specific time of payment precisely because it is payable on demand — the holder can present it for payment at any time.

V. Very Short Answer Questions

Q1. Define Money Market.

AnswerAccording to Crowther, the money market is "the collective name given to various firms and institutions that deal in various grades of near money." It is a market for short-term financial assets that are close substitutes for money, with maturity periods not exceeding one year.

Q2. What is a CD Market?

AnswerThe Certificate of Deposit (CD) Market is the market for buying and selling certificates of deposit. CDs are negotiable instruments issued by commercial banks and financial institutions at a discount to face value. The CD market provides an avenue for banks to raise short-term funds and for investors to park surplus money.

Q3. What is Government Securities Market?

AnswerThe Government Securities Market deals with short-term deposit instruments issued by banks and government securities. These are promissory notes issued by the Government of India, considered among the safest investment options as they carry the sovereign guarantee.

Q4. What do you mean by Auctioning?

AnswerAuctioning is a method of selling Treasury Bills where merchants bid for them and they are sold to the highest bidder. The RBI conducts regular auctions for Treasury Bills, and allotment is made to those who quote the highest price (or lowest discount rate).

Q5. Name the two oldest money markets in the world.

Answer1. London Money Market 2. New York Money Market

VI. Short Answer Questions

Q1. What are the features of Treasury Bills? (FILM V)

AnswerThe features of Treasury Bills can be remembered by the mnemonic FILM V:

1. F — Finance Bills: Treasury Bills are also known as Finance Bills. They are issued by the Government to meet its short-term financial requirements. 2. I — Issuer: They are issued by the Reserve Bank of India on behalf of the Central Government. 3. L — Liquidity: Treasury Bills have a high degree of liquidity as they are readily convertible into cash and carry minimal risk. 4. M — Monetary Management: They serve as an important tool of monetary management by the RBI to regulate money supply in the economy. 5. V — Vital Source: They are a vital source of short-term funds for the Government.

Q2. Who are the participants of the Money Market?

AnswerThe participants of the Money Market include: 1. Central Banks (RBI) 2. Governments (Central and State) 3. Commercial Banks 4. Mutual Funds 5. Public 6. State Bank of India (SBI) and its associates 7. Insurance Companies 8. Non-Banking Financial Institutions (NBFI) 9. Discount Houses 10. Corporate entities

Q3. What are the types of Treasury Bills?

AnswerTreasury Bills are classified into three types based on their maturity period:

1. 91-day Treasury Bills: Maturing in 91 days, used for very short-term financing needs of the Government. 2. 182-day Treasury Bills: Maturing in 182 days, providing a medium short-term investment option. 3. 364-day Treasury Bills: Maturing in 364 days, the longest maturity among T-Bills but still within the one-year money market limit.

All T-Bills are issued at a discount to face value and redeemed at face value; the difference constitutes the investor's return.

Q4. What are the features of a Certificate of Deposit? (TINDU)

AnswerThe features of a Certificate of Deposit can be remembered by the mnemonic TINDU:

1. T — Transferable: CDs are freely transferable by endorsement and delivery. 2. I — Issued at discount: CDs are issued at a discount to face value; the difference between the issue price and face value is the return to the investor. 3. N — No grace days: No grace days are allowed for payment of CDs; they must be paid on maturity. 4. D — Document of title: A CD is a document of title to a time deposit with a bank. 5. U — Unsecured: CDs are unsecured instruments — they are not backed by any collateral.

Q5. What are the types of Commercial Bills?

AnswerCommercial Bills are classified into the following types:

1. Demand Bills / Usance Bills: Demand bills are payable on demand; usance bills are payable after a specified period (30/60/90 days). 2. Clean Bills / Documentary Bills: Clean bills have no documents of title attached; documentary bills are accompanied by documents of title to goods. 3. Inland Bills / Foreign Bills: Inland bills are drawn and payable within India; foreign bills are drawn outside India or drawn in India but payable outside India. 4. Indigenous Bills: Bills drawn according to native customs and practices. 5. Accommodation Bills / Supply Bills: Accommodation bills are drawn without any real transaction; supply bills are drawn by contractors on the Government.

VII. Long Answer Questions

Q1. Compare Money Market and Capital Market.

Answer

Basis	Money Market	Capital Market
Regulator	Regulated by the Central Bank (RBI)	Regulated by Central Bank (RBI) and SEBI
Underwriting	No underwriting facility	Underwriting facility available
Risk	Low credit and market risk	High credit and market risk
Secondary Market	Less active secondary market	Active and well-organised secondary market
Liquidity	High liquidity — instruments readily convertible to cash	Low liquidity — not easily convertible to cash
Duration	Short-term (up to 1 year)	Long-term (more than 1 year)
Instruments	T-Bills, Commercial Bills, CDs, Call Money	Shares, Debentures, Bonds
Return	Low return	High return
Participants	Banks, RBI, Discount Houses	Public, Financial Institutions, Stock Exchanges

Q2. What are the characteristics of the Money Market? (SMS WED)

AnswerThe characteristics of the Money Market can be remembered by the mnemonic SMS WED:

1. S — Short-term Funds: The money market deals with short-term financial assets whose maturity period does not exceed one year. 2. M — Maturity Period up to one year: All instruments in the money market have a maturity period of one year or less. 3. S — Sub-markets: The money market consists of several sub-markets such as the Treasury Bill market, Commercial Bill market, CD market, and Call Money market.

Additional characteristics (beyond the mnemonic):

4. No Formal Place: The money market does not have a formal physical location like a stock exchange; transactions happen over the phone or electronically. 5. Role of Central and Commercial Banks: Central banks and commercial banks play a dominant role in the money market. 6. Highly Organised Banking System: An organised banking system is essential for the smooth functioning of the money market. 7. Existence of Secondary Market: There is an active secondary market for money market instruments, facilitating easy trading. 8. Demand and Supply of Funds: The money market operates based on the demand for and supply of short-term funds. 9. Wholesale Market: Transactions in the money market are typically of large denominations. 10. Flexibility: The money market offers flexibility in terms of investment periods and withdrawal options. 11. Conversion of Cash: Money market instruments are close substitutes for money and can be readily converted into cash. 12. Presence of Central Bank: The central bank (RBI in India) regulates and oversees the money market.

Q3. Explain the instruments of the Money Market.

AnswerThe main instruments of the Money Market are:

1. Treasury Bills:

Answer

Promissory notes issued by the Government for a specific period (91, 182, or 364 days).
Issued at a discount and redeemed at face value.
High liquidity and low risk as they carry the Government's promise of payment.
Used for short-term borrowing by the Government and as a monetary policy tool by the RBI.

2. Commercial Bills:

Answer

Short-term, negotiable, self-liquidating instruments drawn by the seller (creditor) on the buyer (debtor).
Typically have maturity periods of 30, 60, or 90 days.
Used to finance working capital needs and facilitate trade transactions.
Types include Demand Bills, Usance Bills, Clean Bills, Documentary Bills, Inland Bills, and Foreign Bills.

3. Certificates of Deposit (CDs):

Answer

Usance promissory notes issued by commercial banks at a discount to face value.
Easily convertible into cash and freely transferable.
Issued in denominations of Rs. 5 lakhs or multiples thereof.
No grace days for payment; unsecured instruments.

4. Call Money:

Answer

Short-term funds borrowed or lent for a very brief period (overnight to a few days).
Used by banks to manage their daily cash requirements.
Interest rate on call money is determined by market forces of demand and supply.

Q4. What are the features and types of Commercial Bills?

Answer

Features of Commercial Bills: 1. Negotiable Instrument: A commercial bill is a negotiable instrument that can be transferred by endorsement and delivery. 2. Self-liquidating: It is a self-liquidating instrument as it is drawn against the sale of goods and is payable on the due date. 3. Short-term: It has a short maturity period, usually 30, 60, or 90 days. 4. Trade-related: It arises out of a genuine trade transaction involving the sale of goods. 5. Discountable: It can be discounted with a bank before maturity to obtain immediate funds.

Types of Commercial Bills:

Type	Description
Demand Bill	Payable on demand; no specific time of payment
Usance Bill	Payable after a specified period (30/60/90 days)
Clean Bill	No documents of title attached
Documentary Bill	Accompanied by documents of title to goods
Inland Bill	Drawn and payable within India
Foreign Bill	Drawn outside India or payable outside India
Indigenous Bill	Drawn according to native customs
Accommodation Bill	Drawn without any real transaction, for accommodation
Supply Bill	Drawn by contractors on the Government

Q5. What are the characteristics of Government Securities? (SMART IG)

AnswerThe characteristics of Government Securities can be remembered by the mnemonic SMART IG:

1. S — Secured: Government securities are fully secured as they are backed by the sovereign guarantee of the Government. 2. M — Marketable: They are highly marketable and can be easily traded in the secondary market. 3. A — Assured Return: They offer an assured return in the form of regular interest payments. 4. R — Risk-free: Being backed by the Government, they carry virtually no default risk. 5. T — Tax Benefits: Some government securities offer tax benefits under Section 80C of the Income Tax Act. 6. I — Issued by RBI: Government securities are issued by the RBI on behalf of the Central and State Governments. 7. G — Guaranteed Payment: The principal and interest payments on government securities are guaranteed by the Government.

Common Mistakes to Avoid

1. Confusing Money Market with Capital Market: Money market deals with short-term funds (up to 1 year); capital market deals with long-term funds (more than 1 year). Do not mix up the instruments — T-Bills, CDs, and Commercial Bills are money market instruments; shares and debentures are capital market instruments.

2. Treasury Bills vs. Commercial Bills: T-Bills are issued by the Government; Commercial Bills are drawn by sellers on buyers. T-Bills are promissory notes; Commercial Bills are bills of exchange. They are different instruments.

3. CD features: Remember TINDU — Transferable, Issued at discount, No grace days, Document of title, Unsecured. A common mistake is saying CDs are secured — they are NOT.

4. "All of the above" trap in MCQs: When asked about money market characteristics, evaluate each option individually before selecting "All of the above."

5. Inland vs. Foreign Bills: Inland bills are drawn AND payable within India. A bill drawn in India but payable outside India is a foreign bill, not an inland bill.

6. Money market has no formal place: Unlike the stock exchange, the money market does not have a physical location. Transactions occur through phone and electronic systems.

Exam Checklist

[ ] Can you define Money Market and name its key instruments?
[ ] Can you list the features of Treasury Bills (FILM V)?
[ ] Can you list the features of CDs (TINDU)?
[ ] Can you list the characteristics of Government Securities (SMART IG)?
[ ] Can you distinguish Money Market from Capital Market in a comparison table?
[ ] Can you list the types of Commercial Bills with brief descriptions?
[ ] Can you name the participants of the Money Market?
[ ] Can you explain the characteristics of the Money Market (SMS WED)?
[ ] Can you differentiate Demand Bills from Usance Bills, and Clean Bills from Documentary Bills?
[ ] Do you know the three types of T-Bills (91, 182, 364 days)?

Frequently Asked Questions

The money market deals with short-term funds not exceeding one year. It includes Treasury Bills, Commercial Bills, Certificates of Deposit, and Call Money.

Samacheer Kalvi 12th Commerce Chapter 6 Money Market Exercise Solutions

I. Choose the Correct Answer

II. Choose the Correct Answer (Additional MCQs)

III. Match the Following

Match Q1

Match Q2

IV. Assertion and Reason

V. Very Short Answer Questions

VI. Short Answer Questions

VII. Long Answer Questions

Common Mistakes to Avoid

Exam Checklist

Frequently Asked Questions

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