Suppose that a speculative-grade bond issuer announces, just before bond markets open, that it will default on an upcoming interest payment. In the announcement, the issuer confirms various reports made in the financial media in the period leading up to the announcement. Prior to the issuer’s announcement, the financial news media reported the following: (1) suppliers of the company were making deliveries only for cash payment, reducing the company’s liquidity; (2) the issuer’s financial condition had probably deteriorated to the point that it lacked the cash to meet an upcoming interest payment; and (3) although public capital markets were closed to the company, it was negotiating with a bank for a private loan that would permit it to meet its interest payment and continue operations for at least nine months. If the issuer defaults on the bond, the consensus opinion of analysts is that bondholders will recover approximately

\($0.36\) to \($0.38\) per dollar face value.

1. If the market for the bond is highly efficient, the bond’s market price is most likely to fully reflect the bond’s value after default:

A. In the period leading up to the announcement.

B. In the first trade prices after the market opens on the announcement day.

C. When the issuer actually misses the payment on the interest payment date.

2. If the market for the bond is highly efficient, the piece of information that bond investors most likely focused on in the issuer’s announcement was that the issuer:

A. Had failed in its negotiations for a bank loan.

B. Lacked the cash to meet the upcoming interest payment.

C. Had been required to make cash payments for supplier deliveries.