Question

1 A sinking fund provision will:

a) increase the required yield to maturity.

b) reduce the require yield to maturity.

c) reduce the price of the bond.

d) reduce the payment of the bond.

e) reduce the credit rating of the bond.

2 An unexpected increase in market interest rates will cause:
I. bond prices to increase.
II. bond prices to decrease.
III. yields to maturity to increase.
IV. yields to maturity to decrease.

a) I only

b) I and III only

c) I and IV only

d) II and III only

e) II and IV only

Answer 1

1.

reduce the required yield to maturity,

In Sinking Fund provision, bond indenture require issuer to put aside some amount to repay the bond, this makes bond less prone to default and thus reduce yield to maturity.

2.

II and III only

With increase in market interest rate, YTM increases and thus bond price decreases.