Chapter 2 Practice Questions
1. What is a sinking fund?
A. A portfolio of securities designed to be “recession-proof”
B. Money set aside to pay principal on a bond
C. An escrow account specifically assigned to collateralize the revenue-generating asset in a municipal bond
D. A titanic-sized mutual fund where everyone knows something has got to give and it’s on its way down
2. When new bonds are issued with the purpose of using the proceeds to pay off older bonds, it is called?
A. Defeasance
B. A sinking fund redemption
C. Refunding
D. A bond swap
3. Why might a bond issuer decide to issue an advance refunding bond?
A. Because interest rates have risen
B. To lock into the current lower interest rates
C. Because the CPI has gone up
D. To try to increase the yield on its bond issue
4. A make whole call provision is a provision in a bond that allows the issuer to:
A. Call the bond and pay the bondholder a lump sum payment that includes not just the principal but also the net present value of all future coupon payments that the bondholder would have received if not for the call
B. Call the bond and pay the bondholder a lump sum payment that includes the call price of the bond
C. Redeem the entire issue early to issue a new set of bonds at a lower interest rate
D. Call the bond when the total amount of the interest payments is equivalent to the amount of the principal
5. When the proceeds from new refunding bonds are put in escrow and are sufficient to pay off the old refunded bonds, the assets and liabilities cancel each other out on the balance sheet. This is called:
A. A sinking fund redemption
B. Defeasance
C. Crossover refunding
D. A mandatory redemption
6. When money is regularly put into an escrow account in order to redeem the bonds before maturity this is called:
A. A sinking fund redemption
B. Advance refunding
C. Defeasance
D. Make whole