Which of the following statements is CORRECT? Sinking fund provisions sometimes

Question

Which of the following statements is CORRECT?

Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.

If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.

Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time.

A sinking fund provision makes a bond more risky to investors at the time of issuance.

Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature.

Explanation / Answer

Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.

the above is the answer

because the bonds might be called back using sinking fund.

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