5.1 Financial Markets and Securities Offerings Flashcards
Confidential negotiations between Company A and Company B were completed this morning. It was decided that in 1 week, it will be publicly announced that Company A will acquire Company B for a cash offer of a 30% premium over Company B’s current market price. If the stock price of Company B does not react at all today but rises by 30% with the public announcement next week, this implies that the market is
A. Weak form efficient but is not semi-strong form efficient
B. Strong form efficient but is not semi-strong form efficient
C. Semi-strong form efficient but is not strong form efficient
D. Strong form efficient but is not weak form efficient
C. Semi-strong form efficient but is not strong form efficient
Which of the following financial instruments can be traded in international money markets?
A. Mortgages.
B. Preferred stocks.
C. Government treasury bills.
D. Government treasury bonds.
C. Government treasury bills.
Funds are borrowed or lent for short periods (less than 1 year) in money markets. Examples of instruments traded in money markets are U.S. Treasury bills, bankers’ acceptances, commercial paper, negotiable certificates of deposit, money market mutual funds, Eurodollar market time deposits, and consumer credit loans. Capital markets trade stocks and long-term debt.
The strong form of the efficient markets hypothesis (EMH) states that current market prices of securities reflect
A. All publicly available information.
B. All information whether it is public or private.
C. No relevant information.
D. Only information found in past price movements.
B. All information whether it is public or private.
The EMH states that stock prices reflect all relevant information, so the market is continuously adjusting to new information. Stock prices are in equilibrium, so investors cannot earn abnormal returns. The strong form of the EMH states that all public and private information is instantaneously reflected in current market prices of securities. Thus, investors cannot earn abnormal returns.
The semistrong form of the efficient markets hypothesis (EMH) states that current market prices of securities reflect
A. No pertinent information.
B. All pertinent information.
C. Only information contained in past price movements.
D. Only publicly available information.
D. Only publicly available information.
According to the EMH, stock prices are in equilibrium and investors cannot obtain abnormal returns, that is, returns in excess of the riskiness of their investments. The semistrong form of the EMH postulates that current market prices reflect all publicly available information. However, investors with inside information can still earn an abnormal return.
