Which of the following is NOT stated as a quality of an ideal or well functioning capital market?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Its instruments carry a minimum risk of default.
Option (1) Finance is available at reasonable cost. — A quality of a well functioning capital market. An ideal capital market is one where finance is available at reasonable cost.
Option (2) Market operations are free, fair, competitive and transparent. — A quality of a well functioning capital market. Its market operations should be free, fair, competitive and transparent.
Option (3) It minimises transaction costs and allocates capital most productively. — A quality of a well functioning capital market. An efficient capital market should minimise transaction costs and allocate capital most productively.
Option (4) Its instruments carry a minimum risk of default. — Not a quality of the capital market. A minimum risk of default belongs to the money market. Capital market instruments are riskier, both for returns and for principal repayment.
NCERT (Pre-rationalised Edition): “CAPITAL MARKET … An ideal capital market is one where finance is available at reasonable cost. The process of economic development is facilitated by the existence of a well functioning capital market. In fact, development of the financial system is seen as a necessary condition for economic growth. It is essential that financial institutions are sufficiently developed and that market operations are free, fair, competitive and transparent. The capital market should also be efficient in respect of the information that it delivers, minimise transaction costs and allocate capital most productively.” “(vi) Safety: Capital market instruments are riskier both with respect to returns and principal repayment. Issuing companies may fail to perform as per projections and promoters may defraud investors. But the money market is generally much safer with a minimum risk of default. This is due to the shorter duration of investing and also to financial soundness of the issuers, which primarily are the government, banks and highly rated companies.” |