Even Though Many Bonds Have Deferred Sinking Funds, the Sinking

question 71

Multiple Choice

Even though many bonds have deferred sinking funds, the sinking fund has the following effects on bondholders:

• A)provides extra protection to bondholders as both an early warning system and perhaps some collateral cash and provides an option to the firm to buy bonds at the lower of market or face value.
• B)puts the bondholders at added risk due to potential inability to meet sinking fund payments.
• C)provides an option to the firm to buy bonds at the lower of market or face value.
• D)provides an option to the firm to buy bonds at the lower of market or face value and puts the bondholders at added risk due to potential inability to meet sinking fund payments.

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Definitions:

Increasing Returns

A situation where the addition of more units of input results in a more-than-proportional increase in output.

Competitive Market

A market structure characterized by many buyers and sellers, such that no single party can dictate the market price.

Long-Run Cost

The total cost of production when all inputs, including both fixed and variable costs, are considered fully adjustable.

Economies Of Scale

The cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.