Sinking Fund

Question 1

Created and setup purposely for repaying debt.
-it is used by corporations for bonds and deposits money to buy back issued bonds or pasts of bonds before the maturity date arrives.
- it is also one way of enticing and investors because the fund helps convince them that the user will not default on their payments.

Answer 1

Sinking fund

Question 2

-through most bonds take several years to mature it is always easier and more convenient to be able to reduce the principal amount long before it matures consequently lowering credit risk.
- important and effective way of saving money for something to buy or own.

Answer 2

Sinking fund

Question 3

-investors are very well aware that companies or organizations with a large amount of debt are potentially risky.
-however, once they know that there is an established sinking fund, they will see a certain level of protection for them so that in the case of a default or bankruptcy they will still be able to get their investment.
A. Brings in investors
B. The possibility of lower interest rates
C. Stable finances

Answer 3

A. Brings in investors

Question 4

A company with the poor credit ratings will find it difficult to attract investors unless they offer higher interest rates.
- a sinking fund offers alternative protection for investors so that companies can offer lower interest rates.
A. Brings in investors
B. The possibility of lower interest rates
C. Stable finances

Answer 4

B.The possibility of lower interest rates

Question 5

A company’s economic situation is not always definite and certain financial. however, with a sinking fund the ability of a company to repay its debts are bye back bands will not be compromised.

A. Brings in investors
B. The possibility of lower interest rates
C. Stable finances

Answer 5

C. Stable finances

Question 6

Sinking fund versus savings account
-both involves setting aside an amount of money for the future.

Answer 6

Sinking fund - is set up for a particular purpose and to be used at a particular time.
Savings account - is set-up for any purpose that it may serve.

Question 7

Sinking fund vs emergency fund
Sinking fund - is not similar to an emergency fund as the former is purposely established for something definite while the latter is for something unexpected.

Answer 7

Emergency fund - is set aside for an event that is not no but can happen anytime.

Question 8

What is a sinking fund?
A) A fund to cover unexpected expenses
B) A fund to retire a long-term debt
C) A fund for short-term investments
D) A fund to pay regular operational costs

Answer 8

Correct Answer: B) A fund to retire a long-term debt

Question 9

How does a sinking fund work?
A) It’s used for daily expenses
B) It’s invested to generate income
C) It’s maintained for emergency purposes
D) It’s dedicated to paying off a specific debt

Answer 9

Correct Answer: D) It’s dedicated to paying off a specific debt

Question 10

What is the primary goal of a sinking fund?
A) To accumulate savings
B) To pay current bills
C) To invest in stocks
D) To pay off a debt at maturity

Answer 10

Correct Answer: D) To pay off a debt at maturity

Question 11

Which of the following is a benefit of using a sinking fund?
A) Increased interest payments
B) Reduced financial risk
C) Higher stock returns
D) Quicker debt accumulation

Answer 11

Correct Answer: B) Reduced financial risk

Question 12

When creating a sinking fund, what factor determines the amount to be deposited regularly?
A) Personal preference
B) Debt interest rates
C) Current stock market conditions
D) Future investment potential

Answer 12

Correct Answer: B) Debt interest rates

Question 13

Which of the following debts is most suitable for a sinking fund approach? A) Short-term credit card debt
B) Variable rate mortgage
C) Auto loan with a fixed interest rate
D) Student loan with deferred payments

Answer 13

Correct Answer: C) Auto loan with a fixed interest rate

Question 14

What happens if a sinking fund is insufficient to cover the entire debt at maturity?
A) The debt automatically extends
B) The debtor faces legal action
C) The remaining debt is refinanced
D) The creditor forgives the remaining amount

Answer 14

Correct Answer: C) The remaining debt is refinanced

Question 15

Which financial principle aligns closely with a sinking fund strategy? A) Compound interest
B) Diversification
C) Amortization
D) Capital gains

Answer 15

Correct Answer: C) Amortization

Question 16

Which entity typically establishes a sinking fund provision for its bonds? A) Government agencies
B) Corporations
C) Non-profit organizations
D) All of the above

Answer 16

D) All of the above