Canadian Securities Course (CSC) Level 1 Practice Exam 2025 – All-In-One Guide to Master Your Exam Prep!

A sinking fund is a designated account that requires the issuer of a bond to set aside money regularly to ensure there are sufficient funds to redeem the bond at or before its maturity. By accumulating these funds over time, the issuer can pay back a portion of the bonds before their maturity date, which effectively reduces the overall debt burden gradually.

A purchase fund, on the other hand, is a type of fund specifically used to repurchase bonds in the open market. This allows the issuer to manage their outstanding debt and potentially take advantage of favorable market conditions to buy back their own bonds at a lower price, further aiding in the management of repayment.

Together, these funds play a crucial role in financial management for bond issuers, allowing them to reduce the principal outstanding gradually. This is why the role of sinking and purchase funds relates to repaying portions of bonds before maturity, as indicated by the correct answer.