Canadian Securities Course (CSC) Practice Exam

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What does a sinking fund refer to in finance?

a type of savings product that pays a competitive rate of interest and that is guaranteed for one or more years.
the interest rate for these GICs increases over the term.
sums of money set aside out of earnings each year to provide for the repayment of all or part of a debt issue at maturity.
a protective provision providing that no subsequent mortgage bond issue may be secured by all or part of the company's assets.

The correct answer is: sums of money set aside out of earnings each year to provide for the repayment of all or part of a debt issue at maturity.

A sinking fund in finance refers to regular, planned contributions from a company's earnings or cash flow, which are set aside specifically for future debt repayment. This is done in order to prevent default on the debt, as the company will have the funds readily available to make the required payments. Options A, B, and D do not pertain to this specific purpose of a sinking fund in finance. Option A involves a savings product with a competitive interest rate, but it does not necessarily pertain to a company's debt obligations. Option B mentions GICs, which are guaranteed investment certificates, but it does not specify their purpose as debt repayment. Option D mentions a protective provision for bond issues, but it does not directly relate to the concept of a sinking fund for debt repayment. Therefore, option C is the most suitable and accurate description of a sinking fund in finance.