Question

Which of the following is correct?

A. Once a firm declares bankruptcy, it is liquidated by the trustee, who uses the proceeds to pay bond holders, unpaid wages, and lawyer fees.

B. A firm with a sinking fund payment coming due would generally choose to buy back bonds in the open market, if the price of the bond exceeds the sinking fund call price.

C. Income bonds pay interest only when the firm has sufficient income to cover the interest payments. Thus, these securities cannot bankrupt a company and this makes them risked to investors than regular bonds.

D. One disadvantage of zero-coupon bonds is that issuing firms cannot realize the tax savings from isssuing debt until the bonds mature.

Answer 1

Interest bonds are required to pay interest only when the company has sufficient interest income to pay for the bonds. There will be no risk of default if the company does not have sufficient to pay.

Hence, correct option is “C. Income bonds pay interest only when the firm has sufficient income to cover the interest payments. Thus, these securities cannot bankrupt a company and this makes them risked to investors than regular bonds.”