Periodic payments made by a bond issuer to reduce, in an orderly manner, the amount of outstanding principal on bond issue over the life of the bond is known as a
A) call feature
B) private placement
C) sinking fund
D) secondary distribution

Question

Quizplus · Accepted Answer

A sinking fund is a pool of money set aside by a bond issuer to repay part of the principal amount outstanding on a bond issue over time. The periodic payments made by an issuer to this fund are called sinking fund payments. The purpose of a sinking fund is to reduce the issuer's default risk by providing an orderly means of retiring the bond issue. A sinking fund reduces the credit risk associated with the bond and makes it more attractive to investors. Choices A, B, and D are not correct; a call feature is an option given to the issuer to redeem a bond prior to maturity, a private placement is a type of bond issuance in which an issuer sells a bond to a limited number of investors, and a secondary distribution is the sale of a security by someone other than the issuer, such as a shareholder or underwriter.

Periodic Payments Made by a Bond Issuer to Reduce, in an Orderly