Series 7 practice questioneasyDebt Securities — Corporate Bonds — Sinking Fund
A sinking fund provision in a bond indenture requires the issuer to:
- AMaintain a cash reserve equal to the bond's face value at all times
- BRetire a portion of the bond issue periodically prior to maturity✓ Correct answer
- CPay double interest if the company's earnings decline
- DConvert bonds to equity if the stock price falls below par
Explanation
Why B — Retire a portion of the bond issue periodically prior to maturity
A sinking fund provision requires the issuer to set aside money periodically to retire a portion of the bond issue before the final maturity date. This reduces the issuer's total debt over time and decreases default risk for bondholders. The issuer may retire bonds through open market purchases or by calling bonds at par through a lottery process specified in the indenture.
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