Of the following provisions that may be found in a bond indenture, which would tend to reduce the coupon interest rate?
A) a call provision
B) no restrictive covenants
C) a sinking fund provision
D) change in bond rating from Aaa to Aa
E) an indenture provision

Question

Quizplus · Accepted Answer

A sinking fund provision tends to reduce the coupon interest rate because it requires the issuer to set aside funds over time to retire a portion of the bond issue, thus reducing the default risk for investors. This makes the bonds less risky and therefore requires a lower interest rate to attract buyers. Choices A and D may increase the coupon interest rate, as a call provision gives the issuer the option to retire the bonds before maturity (reducing the duration and risk to the issuer), and a downgrade in bond rating increases default risk. Choice B is neutral, as restrictive covenants can both increase or decrease risk depending on their specific terms. Choice E is not relevant, as an indenture provision can include a variety of terms and does not necessarily affect the coupon interest rate.

Of the Following Provisions That May Be Found in a Bond