A sinking fund is useful to a corporation because:
A) The corporation does not have to worry about paying the bondholders
B) It provides the corporation with the option to buy the bonds back at the lower of face value or market price
C) The payments to the sinking fund are not necessary when the firm is in financial difficulty
D) They are simple and easy to monitor

Question

Quizplus · Accepted Answer

A sinking fund provides a corporation with the option to buy back its bonds at the lower of face value or market price. This can be beneficial for the corporation as it helps to reduce its debt burden and interest payments. Further, it may also improve the company's credit rating and make it easier to raise capital in the future. The payments to the sinking fund are mandatory and must be made regardless of the financial health of the corporation.

A Sinking Fund Is Useful to a Corporation Because