SIE Exam Question 648: Answer and Explanation

Question: 648

If interest rates __________ following a bond issue, a sinking-fund provision will allow the issuing company to reduce the interest rate risk of its bonds as it replaces a portion of the existing debt with __________ bonds.

• A. decline, higher yielding
• B. decline, lower yielding
• C. rise, higher yielding
• D. rise, lower yielding

Correct Answer: B

Explanation:

If interest rates decline following a bond issue, a sinking-fund provision will allow an issuing company to reduce the interest rate risk of its bonds as it replaces a portion of the existing debt with lower yielding bonds.