A sinking fund can be set up in one of two ways:● The corporation makes annual payments to the trustee, who invests the proceeds insecurities (frequently government bonds) and uses the accumulated total to retire thebond issue at maturity.● The trustee uses the annual payments to retire a portion of the issue each year, callinga given percentage of the issue by a lottery and paying a specified price per bondor buying bonds on the open market, whichever is cheaper.What are the advantages and disadvantages of each procedure from the viewpoint of thefirm and the bondholders?
A sinking fund can be set up in one of two ways:● The corporation makes annual payments to the trustee, who invests the proceeds insecurities (frequently government bonds) and uses the accumulated total to retire thebond issue at maturity.● The trustee uses the annual payments to retire a portion of the issue each year, callinga given percentage of the issue by a lottery and paying a specified price per bondor buying bonds on the open market, whichever is cheaper.What are the advantages and disadvantages of each procedure from the viewpoint of thefirm and the bondholders?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A sinking fund can be set up in one of two ways:
● The corporation makes annual payments to the trustee, who invests the proceeds in
securities (frequently government bonds) and uses the accumulated total to retire the
bond issue at maturity.
● The trustee uses the annual payments to retire a portion of the issue each year, calling
a given percentage of the issue by a lottery and paying a specified price per bond
or buying bonds on the open market, whichever is cheaper.
What are the advantages and disadvantages of each procedure from the viewpoint of the
firm and the bondholders?
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