Match each bond structure feature or redemption provision on the left with its corresponding operational description on the right.
- Sinking fund provisionRequires the issuer to periodically set aside money into a custodial account to retire portions of the issue prior to maturity.
- Call provisionAllows the issuer to redeem outstanding bonds prior to maturity, typically exercised when prevailing interest rates decline.
- Put provisionGrants the bondholder the right to force the issuer to redeem the bond before maturity, usually exercised when market rates rise.
- RefundingThe practice of raising capital by selling a new bond issue to pay off an existing higher-interest debt issue.
Answer
Sinking fund provision matches periodic custodial deposits for early retirement; Call provision matches issuer right to redeem early when interest rates drop; Put provision matches bondholder right to redeem early when interest rates rise; Refunding matches replacing existing debt with a new issue at lower rates.
Each feature corresponds to its specific redemption right or requirement: Sinking funds require compulsory debt amortization deposits; call provisions grant issuers the option to redeem early during declining interest rate environments; put provisions grant investors the right to redeem early during rising interest rate environments; refunding represents refinancing debt via a new bond issue.
Step-by-Step Solution
Key Concept
Debt Security Covenants and Early Redemption Provisions