Which of the following statements is most correct?
A) Sinking fund provisions do not require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
B) Sinking fund provisions sometimes work to the detriment of bondholders - particularly if interest rates have declined over time.
C) If interest rates have increased since the time a company issues bonds with a sinking fund provision, the company is more likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.
D) Statements a and b are correct.
E) Statements b and c are correct.

Question

Quizplus · Accepted Answer

Statement b is correct because if interest rates decline, the company may not be able to invest the sinking fund assets at a rate high enough to pay the call price when the bonds become due, which could hurt bondholders. Statement c is correct because if interest rates have increased, the sinking fund call price may be lower than the market price of the bond, making it more advantageous for the company to buy back the bonds in the open market. Statement a is incorrect because sinking fund provisions do require companies to retire their debt gradually over time.

Which of the Following Statements Is Most Correct