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 the corporation with the option to buy bonds back at the lower of face value or market price, which can be beneficial if interest rates decrease or market conditions change. This can save the corporation money in the long run and improve its financial standing. However, the payments to the sinking fund are necessary and cannot be skipped, even if the firm is in financial difficulty. Therefore, options A, C, and D are incorrect.

A Sinking Fund Is Useful to a Corporation Because