Question

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?
a. callable feature
b. convertible feature
c. subordination clause
d. sinking fund

Answer 1

Answer:

d. sinking fund.

Explanation:

A bond refers to a debt or fixed investment security, in which a bondholder (creditor or investor) loans an amount of money to the bond issuer (government or corporations) for a specific period of time.

Generally, the bond issuer is expected to return the principal at maturity with an agreed upon interest to the bondholder, which is payable at fixed intervals.

A sinking fund is a provision of a bond indenture which is designed to ease the burden of principal repayment by spreading it out over several years.

Hence, a sinking fund is generally viewed or assumed to protect the bondholders such as creditors or investors because the fund set aside would serve as a collateral incase the bond issuer can't pay in the future.