UPSC Prelims 2023 Question:

Consider the following markets:

1. Government Bond Market
2. Call Money Market
3. Treasury Bill Market
4. Stock Market
   
   

How many of the above are included in capital markets?

Explanation:

The money market is where short-term debt and lending takes place, usually for one year or less. The capital market is where long-term assets, such as stocks and bonds, are traded. The money market is less risky but also less rewarding than the capital market, which is more volatile but potentially more profitable.

Money Market Instruments

• Treasury bills carry zero risk, and the central bank issues them.
• Certificate of deposits: it functions as a receipt for money deposited at a financial organization or bank.
• Commercial paper promises higher returns; it is an unsecured promissory note issued by high-rated companies.
• Repurchase agreements: loans of short duration to sell and repurchase. 
• Banker’s acceptance: similar to a treasury bill, it is a document promising guaranteed payments in the future by commercial banks.

Based on this definition, we can see that only two of the above markets are included in the capital market, that is Government Bond Market and the stock market. The other two, Call Money Market and Treasury Bill Market are part of the money market, as they deal with short-term financial instruments.

Capital Market Instruments

• Equities: Refers to buying a company’s equity stock and becoming a shareholder of that organization.
• Debt securities: Financial assets that entitle the owner to continuous interest payments
• Derivatives: The values of these financial instruments are determined by underlying assets like currency, bonds, stock, etc.
• Exchange-traded funds: A pool of financial resources of many investors which are used to buy different capital market instruments
• Foreign exchange instruments: mainly consists of currency agreements and derivatives and are represented on a foreign market.

Therefore, option (2) is the correct answer.