What is the primary purpose of a sinking fund in relation to investments in securities?

• A. To increase the market value of a company's stock
• B. To accumulate funds for the repayment of a bond issue at maturity
• C. To finance the purchase of new equipment
• D. To provide dividends to shareholders on a regular basis

Answer: (B)

Verified step by step guidance

1. Understand the concept of a sinking fund: A sinking fund is a financial strategy used by companies to set aside money over time to repay a debt or bond issue at maturity. It ensures that the company has sufficient funds to meet its obligations when the bond matures.
2. Analyze the options provided in the question: Evaluate each option to determine which aligns with the primary purpose of a sinking fund. For example, increasing market value, financing equipment, or providing dividends are not directly related to the repayment of bonds.
3. Focus on the correct purpose: The primary purpose of a sinking fund is to accumulate funds specifically for the repayment of a bond issue at maturity. This reduces the risk of default and reassures investors about the company's financial stability.
4. Relate the sinking fund to bond repayment: Companies often deposit money into the sinking fund periodically, which can be invested in low-risk securities to grow the fund until the bond's maturity date.
5. Conclude the reasoning: Based on the explanation, the correct answer is 'To accumulate funds for the repayment of a bond issue at maturity,' as this aligns with the fundamental purpose of a sinking fund.