Which of the Following Statements Is CORRECT

question 73

Multiple Choice

Which of the following statements is CORRECT?

• A) Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates
• Decline after the bond has been issued.
• B) Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay
• Off bondholders when the bonds mature.
• C) A sinking fund provision makes a bond more risky to investors at
• The time of issuance.
• D) Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its
• Debt over time.
• E) If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.

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Definitions:

Unlevered Cost

The cost of an investment that does not take into account the effect of financial leverage, or borrowing.

Debt-Equity Ratio

The debt-equity ratio is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.

Pre-Tax Cost

The expense or cost that a company incurs which is calculated before any taxes are applied.

Return on Assets

A financial metric that indicates how profitable a company is relative to its total assets, demonstrating how efficient a company is at using its assets to generate earnings.