1. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

a. A reduction in market interest rates.

b. The company's bonds are downgraded.

c. An increase in the call premium.

d. Answers a and b are correct.

e. Answers a, b, and c are correct.

2. All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a

a. Sinking fund.

b. Restrictive covenant.

c. Call provision.

d. Change in rating from Aa to Aaa.

e. None of the above (all may reduce the required coupon rate).

3. Which of the following about sinking funds is most correct?

a. Sinking fund provisions do not require companies to retire their debt; they only establish targets for the company to reduce its debt over time.

b. Sinking fund provisions sometimes work to the detriment of bondholders particularly if interest rates have declined over time.

c. If interest rates have increased since the time a company issues bonds with a sinking fund provision, the company is more likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.

d. Statements a and b are correct.

e. Statements b and c are correct.