Q1.

The money market is the arena in which financial institutions make available to a
broad range of borrowers and investors the opportunity to buy and sell various forms of
short-term securities. The short-term debts and securities sold on the money markets which
are known as money market instruments have maturities ranging from one day to one year
and are extremely liquid. Treasury bills, federal agency notes, certificates of deposit (CDs),
euro dollar deposits, commercial paper, bankers' acceptances, and repurchase agreements are
examples of instruments. The suppliers of funds for money market instruments are
institutions and individuals with a preference for the highest liquidity and the lowest risk.

TYPES OF MONEY MARKET INSTRUMENTS

1. Treasury Bills

Treasury bills (T-bills) are short-term notes. They come in three different lengths to
maturity: 90, 180, and 360 days. The two shorter types are auctioned on a weekly basis, while
the annual types are auctioned monthly. T-bills can be purchased directly through the
auctions or indirectly through the secondary market.

2. Federal Agency Notes

Some agencies of the federal government issue both short-term and long-term obligations.
These obligations are not generally backed by the government, so they offer a slightly higher
yield than T-bills, but the risk of default is still very small. Agency securities are actively
traded, but are not quite as marketable as T-bills. Corporations are major purchasers of this
type of money market instrument.

3. Short-Term Tax Exempts

These instruments are short-term notes issued by state and municipal governments.
Although they carry somewhat more risk than T-bills and tend to be less negotiable, they
feature the added benefit that the interest is not subject to federal income tax. For this reason,
corporations find that the lower yield is worthwhile on this type of short-term investment.

4. Certificates of Deposit

Certificates of deposit (CDs) are certificates issued by a federally chartered bank against
deposited funds that earn a specified return for a definite period of time. They are one of
several types of interest-bearing "time deposits" offered by banks. An individual or company
lends the bank a certain amount of money for a fixed period of time, and in exchange the
bank agrees to repay the money with specified interest at the end of the time period. The
certificate constitutes the bank's agreement to repay the loan. The maturity rates on CDs
range from 30 days to six months or longer, and the amount of the face value can vary greatly
as well. There is usually a penalty for early withdrawal of funds, but some types of CDs can
be sold to another investor if the original purchaser needs access to the money before the
maturity date.
 5. Commercial Paper

Commercial paper refers to unsecured short-term promissory notes issued by financial

and nonfinancial corporations. Commercial paper has maturities of up to 270 days (the
maximum allowed without SEC registration requirement). It is typically issued by large,
credit-worthy corporations with unused lines of bank credit and therefore carries low default
risk.

6. Bankers' Acceptances

A banker's acceptance is an instruments produced by a nonfinancial corporation but in the

name of a bank. It is document indicating that such-and-such bank shall pay the face amount
of the instrument at some future time. The bank accepts this instrument, in effect acting as a
guarantor. To be sure the bank does so because it considers the writer to be credit-worthy.
Bankers' acceptances are generally used to finance foreign trade, although they also arise
when companies purchase goods on credit or need to finance inventory. The maturity of
acceptances ranges from one to six months.

7. Repurchase Agreements

Repurchase agreements also known as repos or buybacks are Treasury securities that are
purchased from a dealer with the agreement that they will be sold back at a future date for a
higher price. These agreements are the most liquid of all money market investments, ranging
from 24 hours to several months. In fact, they are very similar to bank deposit accounts, and
many corporations arrange for their banks to transfer excess cash to such funds automatically.

Q2.

A capital market is a financial market in which long-term debt (over a year)

or equity-backed securities are bought and sold

Below mention is the step by step process of investing in capital market:

1. Goal Setting: A formal assessment of your needs, goals, tolerance for risk and
timeframe. The investment process begins with understanding and establishing clear
financial goals. This is where you establish your investment blueprint.
2. Portfolio Construction: Developing the foundation and framework for your
portfolio which is divided into two primary parts: asset allocation and investment
selection. Asset allocation determines how your investment assets are allocated across
the different investment classes defined broadly as equities, fixed income securities,
cash or money market instruments, and real assets (such as real estate, commodities
and other assets). Investment selection is the step where the stocks that make up the
equity component, the bonds that make up the fixed income component and the real
assets.
3. Implementation: Once asset allocation and investment selection decisions are made, they
must be executed through the purchase and sale of assets or securities, resulting in your
investment portfolio.

4. Portfolio Monitoring & Evaluation: The final part of the investment process is
performance monitoring and portfolio evaluation. Over time, it’s essential to monitor both
your own financial situation as well as the management of your portfolio. Any changes in
your objectives, risk tolerance, income, net worth or liquidity needs—or changes that take
place in your life, like marriage or divorce, the birth of a child or death of a spouse will
require your investment plan to be updated accordingly.

5. Find a Broker or Advisor: The type of advisor that is right for you depend on the amount
of time you are willing to spend on your investments and your risk tolerance. Choosing a
financial advisor is a big decision. Factors to consider include their reputation and
performance, how much they charge, how much they plan on communicating with you and
what additional services they can offer.

6. Learn the Costs: It is equally important to learn the costs of investing, as certain costs
can cut into your investment returns. As a whole, passive investing strategies tend to have
lower fees than active investing strategies such as trading stocks. Stock brokers typically
charge commissions.
7. Keep Emotions at Bay: Don't let fear or greed limit your returns or inflate your losses.
Expect short-term fluctuations in your overall portfolio value. As a long-term investor, these
short-term movements should not cause panic. Greed can lead an investor to hold on to a
position too long in the hope of an even higher pric even if it falls. Fear can cause an investor
to sell an investment too early, or prevent an investor from selling a loser. Successful
investors remain disciplined and are not influenced by day-to-day fluctuations or outside
factors.

Thus Nisha can follow the above steps while choosing to start investing in trading
mechanisms.

Q3. a.

Systematic risk is risk within the entire system. This is the kind of risk that applies to
an entire market, or market segment. All investments are affected by this risk, for example
risk of a government collapse, risk of war or inflation, or risk such as that of the 2008 credit
crisis. It is virtually impossible to protect your portfolio against this risk. It cannot be
completely diversified away. It is also known as un-diversifiable risk or market risk.

Types of Systematic Risk:

•Interest risk: Risk caused by the fluctuation in the rate or interest from time to time and
affects interest-bearing securities like bonds and debentures.
•Inflation risk: Alternatively known as purchasing power risk as it adversely affects the
purchasing power of an individual. Such risk arises due to a rise in the cost of production, the
rise in wages, etc.

•Market risk: The risk influences the prices of a share, i.e. the prices will rise or fall
consistently over a period along with other shares of the market.

Q3. b.

Unsystematic risk is also known as residual risk, specific risk or diversifiable risk. It
is unique to a company or a particular industry. For example strikes, lawsuits and such events
that are specific to a company, and can to an extent be diversified away by other investments
in your portfolio are unsystematic risk.

Types of Unsystematic Risk:

•Business risk: Risk inherent to the securities, is the company may or may not perform well.
The risk when a company performs below average is known as a business risk. There are
some factors that cause business risks like changes in government policies, the rise in
competition, change in consumer taste and preferences, development of substitute products,
technological changes, etc.

•Financial risk: Alternatively known as leveraged risk. When there is a change in the capital
structure of the company, it amounts to a financial risk. The debt – equity ratio is the
expression of such risk.