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Issuers can gradually reduce the outstanding balance of a bond issue by using a sinking fund account into which they deposit a specified amount of money each year. To operationalize the sinking fund provision of an indenture, issuers can (1) purchase a portion of the debt in the open market or (2) call the bonds if they contain a call provision. Under what circumstances would a firm be more likely to buy the required number of bonds in the open market as opposed to using one of the other procedures?

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Answer:

The question is incomplete, the options are as follows:

(a). When interest rates are lower than they were when bonds were issued.

(b). When interest rates are higher than they were when bonds were issued.

Explanation:

Whenever the rates fall, it does not make logical sense for the bond or securities issuer to continue charging investors higher-than-average interest because a clause and provision in the bond encourages withdrawal or redemption before maturity.

There the correct answer is (a).

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