Sometimes One Observes That the Price of a Company's Stock

question 1

Multiple Choice

Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is

• A)clearly inconsistent with the efficient markets hypothesis.
• B)consistent with the efficient markets hypothesis if the earnings were not as high as anticipated.
• C)consistent with the efficient markets hypothesis if the earnings were not as low as anticipated.
• D)consistent with the efficient markets hypothesis if the favorable earnings were expected.

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Definitions:

Face Value

The nominal value stated on a financial instrument, such as a bond or stock certificate, representing its official worth.

Par Value

The nominal value or face value given to a security or bond by the issuer.

Default Risk Premium

The additional amount a borrower must pay to compensate the lender for assuming the risk that the borrower may default on the loan.

Clean Price

The price of a bond excluding any accrued interest; the price the bond is actually quoted at in the financial markets.