Unit 1: Introduction to the financial system
Financial Markets and Services notes · PTU syllabus (BBA 522-18)
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Unit summary
A financial system channels savings into investment. This unit covers the components of the financial system, the money market — its instruments, functioning and participants — the structure and functions of the Indian capital market, and the meaning and types of financial services.
After this unit you can
- Explain the components and functions of the financial system
- Describe money market instruments and participants
- Explain the structure and functions of the capital market
- Define financial services and classify them
PTU syllabus topics
- Components and key elements of the financial system
- the money market — instruments
- functioning and participants
- structure and functions of the Indian capital market
- meaning and types of financial services
Institutions
Banks, NBFCs, insurers, mutual funds
Markets
Money market and capital market
Instruments
T-bills, CPs, shares, bonds
Services
Leasing, merchant banking, rating
Regulators
RBI, SEBI, IRDAI, PFRDA
Topic 1
The financial system
The financial system is the set of institutions, markets, instruments and services that move funds from savers to borrowers.
Financial institutions
Banks, NBFCs, insurers, mutual funds
Financial markets
Money market and capital market
Financial instruments
Bills, bonds, shares, deposits
Financial services
Merchant banking, leasing, credit rating
Regulators
RBI, SEBI, IRDAI, PFRDA
Functions: mobilising savings, allocating funds, providing liquidity, reducing risk, facilitating payments and price discovery.
Topic 2
The money market
The money market deals in short-term funds (up to one year).
| Instrument | Features |
|---|---|
| Call / notice money | Overnight to 14-day inter-bank loans |
| Treasury bills | Government short-term securities: 91, 182, 364 days, issued at a discount |
| Commercial paper | Unsecured short-term promissory notes of companies |
| Certificates of deposit | Short-term deposits issued by banks |
| Repo / reverse repo | Short-term borrowing against securities |
Participants: RBI, commercial banks, the government, financial institutions, mutual funds and corporates. The RBI regulates the money market.
Topic 3
The capital market
The capital market deals in long-term funds (more than one year).
Maturity
Up to one year
More than one year
Instruments
T-bills, CP, CD, call money
Shares, debentures, bonds
Purpose
Liquidity
Long-term investment
Regulator
RBI
SEBI
Structure: primary market (new issues) and secondary market (stock exchanges); equity and debt segments; institutions such as NSE, BSE, depositories and mutual funds. Functions: mobilising long-term savings, financing industry, liquidity for investors, and price discovery.
Topic 4
Financial services
Financial services are activities that help in raising, deploying and managing funds.
Meaning
The firm provides its own funds
The firm earns fees for services
Examples
Leasing, hire purchase, factoring, venture capital, bill discounting
Merchant banking, credit rating, portfolio management, stock broking, underwriting
Key terms
- Financial system
- Institutions, markets, instruments and services moving funds
- Money market
- Market for short-term funds
- Treasury bill
- A short-term government security issued at a discount
- Commercial paper
- An unsecured short-term note of a company
- Financial services
- Services for raising, deploying and managing funds
Quick revision
- Components: institutions, markets, instruments, services, regulators.
- Money market ≤ 1 year (RBI); capital market > 1 year (SEBI).
- T-bills: 91, 182, 364 days.
- Fund-based vs fee-based services.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define the financial system.
- Q2.Name four money market instruments.
- Q3.What is commercial paper?
- Q4.Differentiate between the money market and the capital market.
- Q5.Differentiate between fund-based and fee-based financial services.
Long-answer questions
- Q1.Explain the components and functions of the Indian financial system.
- Q2.Explain the instruments and participants of the money market.
- Q3.Explain the structure and functions of the Indian capital market.
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