Question

1. The Price of Fuddy Co. stock recently jumped when the sudden, unexpected death of the CEO was announced. What might account for such a market reaction?

2.   According to the Efficient Markets Hypothesis, how might access to insider, non-public information give rise to unjust rewards/enrichment through the trading of securities? (Be sure to explicitly link your answer back to the Efficient Markets Hypothesis.)

3. A fixed-income security promises to pay $75 each year for the next five years. If pure discount bonds are selling for 0.93, 0.86, and 0.77 cents on the dollar for maturities of 1 year, 2 year, and 3 years, respectively, what is the price of the fixed income security? (Show work)

Answer 1

Solution 1

The unexpected death of the CEO of Fuddy Co. suddenly acted as information for the investors and the public. The spike in the prices of the stock is due to the reaction of the market towards the announcement of CEO’s death. Chief executive officer acts as a fundamental aspect of the entire company. The changes in the stock price occurred due to changes in the fundamental aspect of the company. Since, the CEO is inefficient and prohibits the company’s value from progressing forward or going up, therefore the investor might feel that the company will now have a new fundamental aspect in the form of new CEO which will increase the value of the company.