Which of the Following Statements Is Correct

question 26

Multiple Choice

Which of the following statements is correct?

• A) Because bonds can generally be called only at a premium,meaning that the bondholder will enjoy a capital gain,including a call provision (other than a sinking fund call)in the indenture increases the value of the bond and lowers the bond's required rate of return.
• B) You are considering two bonds.Both are rated double A (AA),both mature in 20 years,both have a 10 percent coupon,and both are offered to you at their $1,000 par value.However,Bond X has a sinking fund while Bond Y does not.This probably is not an equilibrium situation,as Bond X,which has the sinking fund,generally would be expected to have a higher yield than Bond Y.
• C) A sinking fund provides for the orderly retirement of a debt (or preferred stock)issue.Sinking funds generally force the firm to call a percentage of the issue each year.However,the call price for sinking fund purposes is generally higher than the call price for refunding purposes.
• D) Zero coupon bonds are bought primarily by pension funds and other tax exempt investors because they avoid the tax that non-tax exempt investors must pay on the accrued value each year.
• E) All of the above statements are false.

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Definitions:

Progressive Federal Income Tax

A tax system where the tax rate increases as the taxable amount (income) increases, applied at the federal level.

Government's Revenue

The total financial income collected by the government from various sources, including taxes, fees, and investments.

Excise Tax

A tax levied on specific goods, services, or transactions, typically aimed at discouraging consumption of certain items or raising revenue.

Demand Curves

Graphical representations showing the relationship between the price of a good and the quantity demanded by consumers, typically illustrating an inverse relationship.