Bond Sinking fund purpose

Q. When issuing debt, a company may use a sinking fund arrangement as a means of reducing: A credit risk. B inflation risk. C interest rate risk.

Now, as it talks about “why company does this” - I think the company might want to reduce the interest rate risk,ie, the risk that the interest rate change might affect bond’s value!. Because this might directly affect the company. It might have to pay more later on maturity??

As the credit risk is of the investor. So, why would company use SF arrangement thinking in mind investor’s risk? Choice A seems more concerned towards investor, while the question seems to ask the advantage to issuer? Furthermore, a SF arrangement adds to the interest rate risk of an investor, because redeeming at the par value, that is below the current market price (because of fall in interest rates) only hurts the invesor!

It’s a poorly worded question.

The questions on the exam will be clear.

Agree, poorly worded. It shoud read something like “percieved credit risk”. Such that if the company reduces it, they can get a better bond rating and lower cost of debt.