Question

1. What is an important economic role of capital markets? Give an example of a capital market instrument and explain how it works. Who are the main participants in the capital market?

2. List and briefly describe five basic roles of the financial system

3. What are different types of insurers and how do they differ? What are the two types of pension plans?

Answer 1

1)Capital markets play a major role in boosting the economic activities. The capital market is very much helpful in raising the long-term funds for a    business entity. The capital markets helps the country to have an economic growth and stability. If there is a good and highly developed capital market, even foreign countries will be interested in investing funds in our country and by that way foreign capital flows in to our country. And also the public will be interested to invest their savings in the capital market as it gives a higher return of cash.

One of the important type of capital instrument is 'shares'. We all know that most of the companies issue shares. Shares means the portion or part of the company. The shares will be of different values. The owner's of the share is called as shareholder. A share represents the part of ownership of a company. A specific company will be issuing shares of their company to the public. The interested people will buy those shares and they become shareholders. And by buying these shares, the shareholders will get an income know as the dividend. The value of the dividend is according to the value of the share. When the company gets a profit in their business, the shareholders will get a portion of the profit according to the shares they have owned.

There are many participants in the capital market. The major participants are

a) Stock exchange - It facilitates the trading of   services between brokers and the traders. It also distributes the listing of new shares that is held from a company. The stock exchanges provide complete transparency to whoever using it.

b) Retail investors - They are involved in buying and selling of mutual funds, exchange traded funds and securities through brokers.

c) Regulators - The regulators are the people who play an important role in safeguarding the interests of the investors. They will be very closely monitoring and supervising the activities in the market and making investigations.

2) The major functions of the financial system are :-

a) The savings function - The savings of the public will get into the hands of the production through the help of financial system. So by this way the money that is in the hands of producers will help them to produce better goods and services and by this way will increase the living standards of the society.

b) Liquidity function - Most of the people will prefer to store funds in the form of financial instruments like bonds, stocks, and debentures. B eacause even if it increases the risk but it will get more value as it will be not affected by inflation problems.

c) Payment function The financial system provides more effective ways to pay for goods and services. The method of payments like credit card facilities, check systems, can be used for making payments. They will help in reducing the costs and time of transactions.

d) Risk function - The financial market provides many insurance policies. There will be many risks for life, properties and also our health. So these insurance policies will be helpful to reduce the risks.

e) Policy function - The government will interfere and influence many macro economic variables like inflation or interest rates. The government's will be bringing some policies to influence in such situations.

3) There are many type of insurers.

A stock insurer is the corporation that is owned by the stockholders who will be included or participated in the profits and losses of a company. These are privately owned corporations created to attain profit and also to increase the value of the company and to make benefits for the owner's.

A mutual insurer is the type of corporations owned by the policy owners. Buying the insurance policy from the mutual insurer makes them the owner's. The profits are called as policy owners dividends and are shared to owners.

A private insurer can be categorised as life and property insurer. The life insurers gives insurance to the life of people and it is considered as the important insurance. The private insurers gives insurance to our private properties, our assets etc.

There are many different pension plans.

A)  Pension plans with or without life cover

The pension plans with life insurance coverage will give a security to our life's. An assured sum will be given to the nominees in case of death during the policy term.

The other type will not have a coverage on death.

B) Immediate and deferred annuity

The first type is the immediate annuity plans. The premium amount is Paid in one single payment and the pension will be commenced immediately after the premium payment is done. The pension will be commenced in monthly, quarterly, semi annually and annually.

In case of the deferred annuity, the policy holder will pay a definite amount of premium in certain period of time. The money that is accumulated at the end is then used and to buy immediate annuities  which will help in getting a regular income for life.