SIE (Securities Industry Essentials) Practice Exam

A bond owner benefits from a sinking fund provision when bond prices are generally:

1. rising

2. unchanged

3. falling

4. volatile

The correct answer is: falling

A bond owner benefits from a sinking fund provision when bond prices are generally falling. This is because a sinking fund provision allows the issuer of the bond to redeem a portion of the bond before the maturity date, reducing the outstanding amount of the bond and therefore reducing the risk to the bondholder. Option A, rising bond prices, would not benefit the bondholder as the value of their bond would increase and they would lose potential future interest payments. Option B, unchanged bond prices, would also not benefit the bondholder as they would still be receiving the same interest payments without any potential reduction to the outstanding amount of the bond. Option D, volatile bond prices, does not necessarily provide any benefit to the bondholder as it simply means that the bond prices are fluctuating and could be rising, falling, or remaining unchanged.