Q.Explain the instruments of the capital market.

Shares offered to existing shareholders free of cost are bonus shares, so the correct option is (b).

Among capital market instruments:

• Bonus shares are additional shares given free of cost to existing shareholders in proportion to their holding, by capitalising the company's accumulated profits and reserves. No money is collected from the shareholders.
• Right shares are also offered to existing shareholders first, but they must be paid for (usually at a favourable price). …

Government securities are issued by the Central Government, State Governments and semi-government bodies, so all options are correct — (d).

Government securities (also called gilt-edged securities) are the safest instruments in the market because they are backed by the government. They are issued to raise long-term funds for public purposes. The issuing agencies include the Central Government, the State Governments, and semi-government authorities such as local bodies and government undertakings.

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Mutual funds pool small savings to invest in large companies' shares; the answer is option (b).

A mutual fund collects money from a large number of small investors and invests the pooled amount in a diversified portfolio of shares and other securities managed by professionals. This allows a small investor — who could not otherwise buy a spread of large-company shares directly — to participate in the share capital of big companies and share in the returns, while spreading risk.

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