Question

QUESTION 21

1. The financial system is made up of financial institutions, instruments and markets.

   (a) Explain the major role of a financial system.

   (b) Name and briefly explain the three major types of financial instruments that make up the financial system.

   (c) Name a type of non-bank financial institution, explain the role of your non-bank financial institution in the financial system and provide an example of both a source of funds and a use of funds for the non-bank financial institution you have named.

Answer 1

(A). Major role of financial system is to help the economy grow and it will be encouraging the savings and investments and creating a link between the savers and depositors and investors and it will also promote economic development.

(B.)Three major type of financial instrument are as follows-

A. Equity share is most important and popular type of financial instrument which are bought by various investors and which will provide ownership into the company in exchange of capital.

B. Debenture are offered by company which will be providing rights of creditors and they will be provided with interest at regular intervals.these are the type of debt instruments which are offered by the company.

C. Commercial paper is another type of financial instrument which will be issued by the company in order to generate the short term financing and it is a money market instruments.

(C) Non banking financial institution would be housing finance companies which will be providing housing loans to various customers who will be seeking housing loans.

They are used to provide housing loans to various borrowers and they are providing the liquidity into the entire economy. They are using the bank as a source of their funding and there are various housing funding companies like LIC housing finance and housing development finance Corporation Limited are two of the Indian companies who are providing housing loans.