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?

College Accounting, Chapters 1-27

23rd Edition

ISBN:9781337794756

Author:HEINTZ, James A.

Publisher:HEINTZ, James A.

Chapter22: Corporations: Bonds

Section: Chapter Questions

Problem 5MC: Bond sinking fund earnings are (a) subtracted from the bond sinking fund. (b) added to the bond...

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