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
A) I and II only
B) III only
C) II only
D) II and III only

Question

Quizplus · Accepted Answer

The sinking fund provides extra protection to bondholders as an early warning system and collateral cash, as well as an option to the firm to buy bonds at the lower of market or face value. However, there is a potential added risk to bondholders if the firm is unable to meet the sinking fund payments. Therefore, statements I and II are true, while statement III is also true but does not exclude the truth of statements I and II.

Even Though Many Bonds Have Deferred Sinking Funds, the Sinking