A sinking fund is useful to a corporation because:

Question

Quizplus · Accepted Answer

A sinking fund provides the corporation with the option to buy the bonds back at the lower of face value or market price, which can be advantageous if market interest rates have decreased since the bonds were issued. This can save the corporation money on interest payments over the life of the bonds. Option A is incorrect because the corporation still has to pay the bondholders, but the sinking fund can make it easier to do so. Option C is incorrect because the payments to the sinking fund are a contractual obligation and must be made regardless of the financial situation of the firm. Option D is incorrect because monitoring a sinking fund can be complex, especially if the bonds have different amortization schedules or are callable at different times.

A Sinking Fund Is Useful to a Corporation Because