Question

Which of the following statements regarding “Sinking Fund Provision” is most correct?

Select one:

a. A firm will choose to call back bonds for redemption at par value if the bonds are traded at a discount.

b. In general, sinking fund bonds are issued with lower coupon rate than otherwise similar bonds without sinking funds.

c. On balance, bonds that have a sinking fund are regarded as being riskier than those without such a provision.

d. A sinking fund provision gives the issuer the right to sell bonds under specified terms prior to the normal maturity date.

e. A firm will choose to buy the required bonds on the open market if the bonds are treaded at a premium.

Answer 1

Option (d) is most correct.

Explanation - A sinking fund helps companies that have floated debt in the form bonds gradually save money and avoid a large lump sum payment at maturity. Some bonds are issued with the attachment of a sinking fund feature. The prospectus for a bond of this type will identify the dates that the issuer has a option to redeem the bond early using the sinking fund. while the sinking fund helps companies ensure they have enough funds set aside to payoff their debt in some cases they may also use the funds to repurchase preferred shares or outstanding bonds.