LOS d: Explain the provisions for redemption and retirement of bonds.

Q1. The refunding provision found in nonrefundable bonds allows bonds to be retired unless:

A)   the funds come from a lower cost bond issue.

B)   the funds come from the sale of new common stock.

C)   market interest rates have increased substantially.

Q2. Which of the following statements regarding a sinking fund provision is most accurate?

A)   It requires that the issuer retire a portion of the principal through a series of principal payments over the life of the bond.

B)   It requires that the issuer set aside money based on a predefined schedule to accumulate the cash to retire the bonds at maturity.

C)   It permits the issuer to retire more than the stipulated sinking fund amount if they choose.

Q3. On November 15, 2006, Grinell Construction Company decided to issue bonds to help finance the acquisition of new construction equipment. They issued bonds totaling $10,000,000 with a 6% coupon rate due June 15, 2026. Grinell has agreed to pay the entire amount borrowed in one lump sum payment at the maturity date. Grinell is not required to make any principal payments prior to maturity. What type of bond structure has Grinell issued?

A)   Bullet maturity.

B)   Serial bonds.

C)   Income bonds.

Q4. Which of the following is the appropriate redemption price when redemption funds are obtained as a result of a forced sale of assets for deregulatory purposes?

A)   Special redemption price.

B)   Regular redemption price.

C)   General redemption price.

Q5. Which of the following is the appropriate redemption price when bonds are called according to the sinking fund provision?

A)   Special redemption price.

B)   Specific redemption price.

C)   Regular redemption price.

LOS d: Explain the provisions for redemption and retirement of bonds.fficeffice" />

Q1. The refunding provision found in nonrefundable bonds allows bonds to be retired unless:

A)   the funds come from a lower cost bond issue.

B)   the funds come from the sale of new common stock.

C)   market interest rates have increased substantially.

Correct answer is A)

Refunding from a new debt issue at a higher interest rate is not prohibited, however their purchase cannot be funded by the simultaneous issuance of lower coupon bonds.

Q2. Which of the following statements regarding a sinking fund provision is most accurate?

A)   It requires that the issuer retire a portion of the principal through a series of principal payments over the life of the bond.

B)   It requires that the issuer set aside money based on a predefined schedule to accumulate the cash to retire the bonds at maturity.

C)   It permits the issuer to retire more than the stipulated sinking fund amount if they choose.

Correct answer is A)

A sinking fund actually retires the bonds based on a schedule. This can be accomplished through either payment of cash or through the delivery of securities. An accelerated sinking fund provision allows the company to retire more than is stipulated in the indenture.

Q3. On November 15, 2006, Grinell Construction Company decided to issue bonds to help finance the acquisition of new construction equipment. They issued bonds totaling $10,000,000 with a 6% coupon rate due June 15, 2026. Grinell has agreed to pay the entire amount borrowed in one lump sum payment at the maturity date. Grinell is not required to make any principal payments prior to maturity. What type of bond structure has Grinell issued?

A)   Bullet maturity.

B)   Serial bonds.

C)   Income bonds.

Correct answer is A)

These bonds have a bullet maturity structure because the issuer has agreed to pay the entire amount borrowed in one lump-sum payment at maturity.

Q4. Which of the following is the appropriate redemption price when redemption funds are obtained as a result of a forced sale of assets for deregulatory purposes?

A)   Special redemption price.

B)   Regular redemption price.

C)   General redemption price.

Correct answer is A)

When redemption funds are obtained as a result of a forced sale of assets for deregulatory purposes, the funds can be used to redeem bonds at the special redemption price, which are typically par value.

Q5. Which of the following is the appropriate redemption price when bonds are called according to the sinking fund provision?

A)   Special redemption price.

B)   Specific redemption price.

C)   Regular redemption price.

Correct answer is A)

Regular redemption price refers to bonds being called according to the provisions specified in the bond indenture. When bonds are redeemed to comply with a sinking fund provision or because of a property sale mandated by government authority, the redemption prices (typically par value) are referred to as "special redemption prices." There is no such thing as a specific redemption price.

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