A sinking fund is useful to bondholders because:
A) it stops the company from going under or into default.
B) the funds are usable at the option of the bondholders.
C) when a firm has difficulty making payments this sends a signal of potential default.
D) a balloon payment is necessary to fully pay off the bonds at maturity.

Question

Quizplus · Accepted Answer

A sinking fund is a means for a company to pay off part of their debt before it matures to avoid default. It does not stop the company from going under, is not at the option of the bondholders, nor is it specifically for a balloon payment at maturity.

A Sinking Fund Is Useful to Bondholders Because