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

I is correct, as the sinking fund provides some extra protection to bondholders by serving as an early warning system for potential issues and possibly providing collateral cash.
II is also correct, as the firm has the option to buy back the bonds at the lower of market or face value, which could benefit bondholders if the market value is higher than the face value.
III is incorrect, as the sinking fund would typically be funded with regular contributions from the issuer, which would help ensure that there is enough money available to make the required payments at maturity. If the issuer is unable to meet its sinking fund payments, that would likely indicate broader financial distress, which would be a problem for all bondholders, not just those tied to the sinking fund.

Even Though Many Bonds Have Deferred Sinking Funds, the Sinking