CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

A ______ provision gives the corporation the option to force retirement of the entire debt issue prior to maturity, whereas a ______ provision gives the bondholder the same option.

A. sinking fund; call
B. sinking fund; put
C. put; call
D. call; put.
E. call; sinking fund
Correct Answer: D

A call provision is a mechanism for repaying funds advanced through a bond issue. A provision of the bond indenture allows the issuer to retire bonds before maturity by paying holders a premium above principal.

A put provision enables a bond investor to have the option to sell a long-term bond back to the corporation at par value after a relatively short period of time (such as three to five years). This privilege can be particularly valuable if interest rates have gone up and bond prices have gone down.

A sinking-fund provision is a mechanism for repaying funds advanced through a bond issue. The issuer makes periodic payments to the trustee, who retires part of the issue by purchasing the bonds in the open market.

User Contributed Comments 3

User Comment
danlan Sinking fund is an obligation to pay principals before maturity date in order to reduce loss of default risk (if default happens), call and put are two options for issuers and investor.
woori sinking fund is all about reducing loss of default risk by paying out.
2014 If sinking fund is there, then it must be used irrespective of default. You don't have to wait untill default happens and use sinking fund. Meeting Sinking Fund regularly ensures credit risk is minimized. Thats why at the time of issue, issuer needs to mention in indenture about sinking fund. Because sinking fund credit risk is reduced. So now maintain low credit u must meet sinking fund requirements before default
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