This week’s study question from the Solomon Online Exam Simulator question database is now available.
When new bonds are issued with the purpose of using the proceeds to pay off older bonds, it is called?
C. A sinking fund redemption
D. A bond SWAP
Correct Answer: A. Refunding
Rationale: A bond refunding is the replacement of existing bonds with new “refunding“ bonds. The issuer of refunding bonds often seeks to lower its interest payments by paying off its previously issued (refunded) bonds with newly issued bonds that pay interest at a lower rate. Another reason to refund existing bonds may be to release the issuer from legal covenants or restrictions in the original indenture.
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