Question

Which of the following statements is CORRECT? a. Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. b. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price. c. A sinking fund provision makes a bond more risky to investors at the time of issuance. d. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued. e. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature.

Answer 1

Answer:

D. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.

Explanation:

A provision in some bond agreements requiring the issuer to set cash aside to reimburse bondholders at development. In bonds with such a provision, a fund or account is set up into which an issuer stores cash all the time to reimburse the bond when it matures.