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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