Question

Which statement is TRUE about adjustment (income) bonds?

A. Timing of interest payments made is not predictable and any interest payment made is not predictable in amount
B. Timing of interest payments made is not predictable and any interest payment made is predictable in amount
C. Timing of interest payments made is predictable and any interest payment made is predictable in amount
D. Timing of interest payments made is predictable and any interest payment made is not predictable in amount

Answer 1

The correct statement about adjustment bonds is A, as the timing and amount of interest payments are not predictable. Despite bonds commonly being associated with fixed interest rates and predetermined payments, they carry certain risks like interest rate risk, default risk, and liquidity risk, which can affect their value and the ability to receive expected returns.

Step-by-step explanation:

The correct answer to the question is: A. Timing of interest payments made is not predictable and any interest payment made is not predictable in amount. Adjustment bonds are a type of bond issued by a company that is restructuring its debt. These bonds typically arise when a company is in financial difficulty, and they provide the company with flexibility regarding the interest payments. The payments are contingent on the company’s earnings, and therefore, the timing and the amount of interest payments are uncertain because they depend on the future financial performance of the issuing company.

Bonds are somewhat risky to buy, even though they are often seen as safer investments compared to stocks. This risk stems from various factors:

• Interest rate risk: The value of bonds can decline if interest rates rise, as new bonds might be issued at higher rates, making existing bonds with lower rates less attractive.
• Default risk: The possibility that the issuer may be unable to make timely principal and interest payments.
• Liquidity risk: Some bonds may be difficult to sell quickly at a fair price.

These risks make bond investment somewhat unpredictable despite the fixed rate of interest and predetermined payments.

Answer 2

option A is correct answer

Step-by-step explanation:

Scheduling of interest payments is also not consistent and there is no predictable sum of payments made.

A company issues an adjustment bond whenever it reorganizes its liabilities to cope with financial problems or imminent bankruptcy. Adjustment bonds have such a mechanism where payments only occur when company has profits.

It also gives companies the ability to change terms like interest rates & time to completion, gives the company a better chance to fulfill its obligations without going into bankruptcy.