Economy Key Terminologies — Financial Market
1. Previous Year Questions (UPSC)
Context: Understanding key financial market terminologies is crucial for UPSC preparation. The following terms have been asked in previous years' examinations.
| Year | Term | Explanation |
|---|---|---|
| 2022 | Debt Financing | Raising funds by borrowing money from lenders, such as banks or bondholders. Debt financing requires the borrower to repay the loan with interest over a specified period. |
| 2022 | Equity Financing | Raising funds by selling ownership shares in a company to investors. Equity financing does not require the borrower to repay the funds, but it does dilute ownership and profits. |
| 2020 | Commercial Paper | Commercial Paper is a money market instrument for financing working capital requirements of companies. It is an unsecured instrument issued in the form of promissory notes which can be issued for a period ranging from 15 days to one year. |
| 2020 | Promissory Notes | A promissory note is a legal document outlining a borrower's promise to repay a specific amount to a lender. |
| 2020 | Participatory Notes (P-notes) | P-notes are Offshore Derivative Instruments (ODIs) issued by registered Foreign Portfolio Investors (FPIs) to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. P-notes have Indian stocks as their underlying assets. |
| 2020 | Certificate of Deposit (CD) | Certificate of Deposit or CD are short term money market instruments issued by Commercial Banks and special financial institutions which are freely transferable between parties. They are issued at a discount provided on face value. CDs can be issued in India for a minimum deposit of ₹1 lakh and in subsequent multiples of it. |
| 2020 | Call Money/Notice Money | Call money/Notice money is a money market instrument used by the banks to meet their temporary requirement of cash. Call money has a maturity period of one day whereas Notice money's maturity period is two to fourteen days and is used by banks for adjusting to their short-term liquidity imbalances. |
| 2020 | Zero-Coupon Bonds | It is a type of bond that is issued at a discount to its face value, at which it will be redeemed. There are no intermittent interest payments and they are generally issued for long tenure. |
| 2016 | Zero-Coupon Zero Principal (ZCZP) | These instruments are not stocks or bonds but instruments for donating money to the NPOs listed in the Social Stock Exchange. As the name indicates, ZCZP neither offers interest nor returns the principal. |
| 2016 | Bitcoin/Cryptocurrency | Bitcoin is a digital currency that is not tied to any formal institution like bank or government and it also allows users to transact anonymously. Generally, the coins are created by users who ''mine'' them by lending computing power to verify other users' transactions. |
| 2016 | Sovereign Gold Bond | These are government securities denominated in grams of gold issued by the RBI on behalf of the Government. |
| 2016 | Gold Monetization Scheme | It aims to minimise the nation's dependency on gold imports by enabling the use of gold held by households and facilitating their mobilisation for productive uses. |
| 2014 | Venture Capital | It is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. The majority of venture capital is often provided by wealthy individuals, investment banks, and other financial organizations. However, it is not always in the form of money; it can also come in the form of managerial or technological know-how. |
| 2012 | Government Securities (G-Sec) | Government securities are debt instruments issued by the government to finance its budget deficits or other financial obligations. G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. |
| 2012 | State Development Loans (SDLs) | SDLs are dated securities issued through normal auctions by the State Governments similar to Dated G-Secs. |
| 2012 | Treasury Bills (T-bills) | These are short term debt instruments issued by the Centre in three tenors, namely, 91 day, 182 day and 364 day. They are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. |
| 2012 | Cash Management Bills (CMBs) | CMBs are similar to T-bills but are issued for maturities less than 91 days. |
| 2011 | Disinvestment | It refers to the process of selling or liquidating assets, businesses, or investments. It is often done to raise funds or to restructure the organization. In the case of a government, disinvestment may involve selling off its stakes in public sector companies or privatizing state-owned enterprises. |
2. Important Terms in News
Context: These financial market terms frequently appear in news and policy discussions, making them essential for UPSC aspirants to understand.
Sustainable Finance
- Blue Bonds: Blue bonds are a type of sustainable bond specifically designed to finance projects that protect and restore the ocean and its resources.
- Sovereign Green Bonds: Green bonds are issued by companies, countries and multilateral organizations to exclusively fund projects that have positive environmental or climate benefits and provide investors with fixed income payments.
- Social Impact Bond (SIB): A SIB is an innovative financing mechanism in which governments enter into agreements with social service providers, such as NGOs, and investors to pay for the delivery of pre-defined social outcomes. The Pimpri Chinchwad Municipal Corporation (PCMC) in Maharashtra signed an MoU with UNDP India to co-create India's first Social Impact Bond.
Environmental Marketing Terms
- Green Washing: Greenwashing is the act of making false or misleading statements about the environmental benefits of a product or practice.
- Green Wishing: Greenwishing, or unintentional greenwashing, describes a practice where a company hopes to meet certain sustainability commitments but simply does not have the wherewithal to do so.
- Green Hushing: Greenhushing refers to a company's refusal to publicize ESG information. The company may fear pushback from stakeholders who would find its sustainability efforts lacking or from investors who believe ESG undermines returns.
- Blue Washing: A marketing tactic used by companies to deceive consumers into believing that they are working towards achieving sustainable use and conservation of food systems and water bodies.
Debt Instruments
- Municipal Bond: A municipal bond is a debt obligation issued by a nonprofit organization, a private-sector corporation, or another public entity using the loan for public projects, such as constructing schools, hospitals, and highways.
- Fixed Rate Bond: Fixed-rate bonds are suitable for investors seeking stable returns with a low-risk tolerance, unlike equities, which may be volatile. Fixed-rate bonds typically have a lock-in period of one to five years.
- Floating Rate Bond: A floating rate bond is a debt instrument that does not have a fixed coupon rate, but its interest rate fluctuates based on the benchmark the bond is drawn.
- Negative Yield Bonds: A negative bond yield means that an investor receives less income from the bond than they paid for it. A negative bond yield can result when the price paid for the bond is much greater than par.
- Vanilla Debt Products: Plain vanilla debt comes with fixed-rate borrowing and no other features, so the borrower has no convertibility rights. A plain-vanilla approach to financing is called a vanilla strategy.
- Surety Bonds: These are a type of insurance policy protecting parties involved in a transaction or contract from potential financial losses due to a breach of contract or other types of non-performance. The issuing insurer provides guarantee, for a premium, in the case of a default in execution of a project.
Debt Restructuring
- Debt for Nature Swap: Through a debt-for-nature swap, a debtor country reduces its total outstanding external debt. The debtor country is able to buy back part of its debt in more favorable terms and pay for conservation initiatives rather than debt service.
Yield Curve
- Inverted Yield Curve: In finance, an inverted yield curve is a yield curve in which short-term debt instruments (typically bonds) have a greater yield than longer term bonds.
Investment Vehicles
- New Fund Offer (NFO): A new fund offer (NFO) is the first subscription offering for any new fund offered by an investment company.
Key Financial Market Terms at a Glance:
- Sustainable Finance: Blue Bonds, Sovereign Green Bonds, Social Impact Bond
- Environmental Marketing: Green Washing, Green Wishing, Green Hushing, Blue Washing
- Debt Instruments: Municipal Bond, Fixed/Floating Rate Bonds, Negative Yield Bonds, Vanilla Debt, Surety Bonds
- Debt Restructuring: Debt for Nature Swap
- Yield Curve: Inverted Yield Curve
- Investment: New Fund Offer (NFO)
- Sustainable Finance: Blue Bonds, Sovereign Green Bonds, Social Impact Bond
- Environmental Marketing: Green Washing, Green Wishing, Green Hushing, Blue Washing
- Debt Instruments: Municipal Bond, Fixed/Floating Rate Bonds, Negative Yield Bonds, Vanilla Debt, Surety Bonds
- Debt Restructuring: Debt for Nature Swap
- Yield Curve: Inverted Yield Curve
- Investment: New Fund Offer (NFO)
3. Summary: Key Financial Market Terminologies
| Term | Key Definition |
|---|---|
| Debt Financing | Borrowing money from lenders with interest repayment |
| Equity Financing | Selling ownership shares to investors |
| Commercial Paper | Unsecured money market instrument (15 days to 1 year) |
| P-Notes | Offshore derivative instruments for foreign investors |
| Certificate of Deposit (CD) | Short-term money market instrument (min ₹1 lakh) |
| Call Money | 1 day maturity; banks meet temporary cash needs |
| Notice Money | 2-14 days maturity; liquidity adjustment |
| Zero-Coupon Bonds | Issued at discount, redeemed at face value; no interest |
| G-Sec | Risk-free gilt-edged instruments issued by government |
| Treasury Bills (T-bills) | 91, 182, 364 day zero coupon securities |
| Cash Management Bills (CMBs) | Similar to T-bills, less than 91 days |
| Sovereign Gold Bond | Government securities denominated in grams of gold |
| Venture Capital | Private equity for startups with growth potential |
| Social Impact Bond (SIB) | Innovative financing for social outcomes |
| Inverted Yield Curve | Short-term yields higher than long-term yields |
Key Takeaways for UPSC
- Debt vs Equity Financing: Borrowing vs selling ownership
- Money Market Instruments: Commercial Paper, CDs, Call Money, T-bills, CMBs
- G-Sec: Risk-free gilt-edged instruments (UPSC 2012)
- P-Notes: Offshore derivative instruments for foreign investors (UPSC 2020)
- Zero-Coupon Bonds: Issued at discount, no interest (UPSC 2020)
- ZCZP: No interest, no principal - for donations to NPOs (UPSC 2016)
- Social Impact Bond: Innovative financing mechanism (In news)
- Inverted Yield Curve: Short-term yields > long-term yields
High-Yield Interactive UPSC Quiz (Chapter 6: Financial Market)
Q1. Commercial Paper is a money market instrument with maturity ranging from:
Correct Answer: C. Commercial Paper is an unsecured instrument issued in the form of promissory notes which can be issued for a period ranging from 15 days to one year. (UPSC 2020)
Q2. Participatory Notes (P-notes) are issued by:
Correct Answer: C. P-notes are Offshore Derivative Instruments (ODIs) issued by registered Foreign Portfolio Investors (FPIs) to overseas investors. (UPSC 2020)
Q3. Certificate of Deposit (CD) in India can be issued for a minimum deposit of:
Correct Answer: C. CDs can be issued in India for a minimum deposit of ₹1 lakh and in subsequent multiples of it. (UPSC 2020)
Q4. Call money has a maturity period of:
Correct Answer: B. Call money has a maturity period of one day whereas Notice money's maturity period is two to fourteen days. (UPSC 2020)
Q5. Government Securities (G-Sec) are also called:
Correct Answer: C. G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. (UPSC 2012)
Q6. Treasury Bills (T-bills) are issued in which tenors?
Correct Answer: B. Treasury Bills are short term debt instruments issued by the Centre in three tenors, namely, 91 day, 182 day and 364 day. (UPSC 2012)
Q7. Zero-Coupon Zero Principal (ZCZP) instruments are used for:
Correct Answer: C. ZCZP instruments are not stocks or bonds but instruments for donating money to the NPOs listed in the Social Stock Exchange. They neither offer interest nor returns the principal. (UPSC 2016)
Q8. An inverted yield curve occurs when:
Correct Answer: B. An inverted yield curve is a yield curve in which short-term debt instruments have a greater yield than longer term bonds.
Q9. Greenwashing refers to:
Correct Answer: B. Greenwashing is the act of making false or misleading statements about the environmental benefits of a product or practice.
Q10. Social Impact Bonds (SIB) are financing mechanisms for:
Correct Answer: B. Social Impact Bonds are innovative financing mechanisms where governments, NGOs, and investors pay for the delivery of pre-defined social outcomes.