Which of the following statements is CORRECT? a. Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. b. 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. c. 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. d. 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. e. A sinking fund provision makes a bond more risky to investors at the time of issuance.

Which of the following statements is CORRECT? a. Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. b. 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. c. 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. d. 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. e. A sinking fund provision makes a bond more risky to investors at the time of issuance.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter9: Long-term Liabilities

Section: Chapter Questions

Problem 16MCQ

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Similar questions

To what extent does the company’s bond issuance policies support or hinder their strategies? For example, if the company is attempting to fund operating expenses, refinance old debt, or change its capital structure, are they issuing sufficient bonds to achieve these goals? Be sure to substantiate claims.
46. One of the points below is the most accurate?a. After a company files for bankruptcy, the administrator liquidates it, using the money to compensate bondholders, overdue salaries, royalties, and legal fees.b. Where the price of the bond approaches the sinking fund call price, a company with a sinking fund payout due will typically opt to purchase back bonds on the open market.c. Income bonds incur dividends only after the amount of interest received by the corporation is directly earned. As a result, these securities cannot default a corporation, making them better for investors than traditional bonds.d. One drawback to zero coupon bonds being that the tax gains from selling securities are not realised before the bonds maturity.e. Callable bonds should have a lower yield to maturity than noncallable bonds, assuming all other factors remain stable.
Identify the following as either an advantage or a disadvantage of bond financing for a company. a. Bonds do not affect owner control. b. A company earns a lower return with borrowed funds than it pays in interest. c. A company earns a higher return with borrowed funds than it pays in interest. d. Bonds require payment of periodic interest. e. Interest on bonds is tax deductible. f. Bonds require payment of par value at maturity.
Which of the following statements regarding the private debt market is FALSE? A) Private debt has the advantage that it avoids the cost of registration. B) Bank loans are an example of private debt—debt that is not publicly traded. C) Private debt has the disadvantage of being illiquid. D) The public debt market is larger than the private debt market.
Which of the following is incorrect about debt financing? A. Debt financing always generates excess returns which benefits equity investors b. One benefit of debt financing is that interest on most debt is fixed c. One benefit of debt financing is that interest is a tax deductible expense d. It increases financial leverage
Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. a. Requires payments of both periodic interest and par value at maturity. b. Bonds require payment of par value at maturity. C. Bonds do not affect owner control. d. A company earns a lower return with borrowed funds than it pays in interest. e. A company earns a higher return with borrowed funds than it pays in interest. f. Bonds require payment of periodic interest.
Which of the following statements are true about unsecured bonds?I. Income bonds require interest payments only if earned and non-payment of interest does not lead to bankruptcy. Usually issued during the reorganization of a firm facing financial difficulties. II. Debentures are unsecured long-term debt and backed only by the reputation and financial stability of the corporation. Because of this, the earning ability of the issuing corporation is of great concern to the bondholder.III. Claims of bondholders of subordinated debentures are honored only after the claims of secured debt and unsubordinated debentures have been satisfied. IV. Income bonds have longer maturity and unpaid interest is allowed to accumulate for some period of time and must be paid prior to the payment of any dividends to stockholders.
Which of the following is most correct? Treasury bonds carry high default risk because government has the option not to pay its indebtedness. Corporate bonds have lower interest rates compared with treasury bonds because bonds were issued with the aid of financial intermediaries. Corporate bonds have no default risk because they are backed by their corporate assets. Treasury bonds have lower interest rates because they are assumed to carry no default risk.
When a small firm works with an investment banker to raise funds through the sale of bonds on a best-efforts basis, which of the following functions does not come into play? Underwriting Indenture Origination Distribution
Which of the following statements is CORRECT? a. One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature. b. Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds. c. Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees. d. Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond. e. A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
Which of the following is a disadvantage to a corporation issuing bonds? Group of answer choices A)The required interest payment must be met each period. B)The liquid nature of the bonds makes them attractive to investors who may not want to hold them to maturity. c)The large principal payment due at maturity. d)Both the first and third answers above are both disadvantages. e)The first, second and third answers above are all disadvantages.
If bonds payable are not callable, the issuing corporation a.can exchange them for common stock b.can repurchase them in the open market c.is more likely to repurchase them if the interest rates increase d.must get special permission from the SEC to repurchase them