Issuers can gradually reduce the outstanding balance of a bond issue by using a sinking fund account into which they deposit a specified amount of money each year. To operationalize the sinking fund provision of an indenture, issuers can (1) purchase a portion of the debt in the open market or (2) call the bonds if they contain a call provision. Under what circumstances would a firm be more likely to buy the required number of bonds in the open market as opposed to using one of the other procedures?

Question

Business

Muhammad Galloway

19 December, 09:06

Issuers can gradually reduce the outstanding balance of a bond issue by using a sinking fund account into which they deposit a specified amount of money each year. To operationalize the sinking fund provision of an indenture, issuers can (1) purchase a portion of the debt in the open market or (2) call the bonds if they contain a call provision. Under what circumstances would a firm be more likely to buy the required number of bonds in the open market as opposed to using one of the other procedures?

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Answers (1)

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Jayson Clements · Answer 1

The question is incomplete, the options are as follows:

(a). When interest rates are lower than they were when bonds were issued.

(b). When interest rates are higher than they were when bonds were issued.

Explanation:

Whenever the rates fall, it does not make logical sense for the bond or securities issuer to continue charging investors higher-than-average interest because a clause and provision in the bond encourages withdrawal or redemption before maturity.

There the correct answer is (a).