Question

Even though many bonds have deferred sinking funds, the sinking fund has the following effects on bondholders: I) provides extra protection to bondholders as both an early warning system and perhaps some collateral cash; II) provides an option to the firm to buy bonds at the lower of market or face value; III) puts the bondholders at added risk due to potential inability to meet sinking fund payments

Answer 1

Answer: I) provides extra protection to bondholders as both an early warning system and perhaps some collateral cash

II) ) provides an option to the firm to buy bonds at the lower of market or face value.

Explanation:

A sinking fund is typically an amount of money that is being set aside by a company in order to either pay a bind or pay off a particular debt that the company has incurred.

The effect of the sinking bond on bondholders is that it provides extra protection to bondholders as both an early warning system and perhaps some collateral cash and tabt is also provides an option to the firm to buy bonds at the lower of market or face value.

Therefore, option I and II are correct.