Question

a city government sets aside funds periodically into a special account to ensure it can repay the principal of its municipal bonds at maturity. the money in this account is invested in government bonds that pay a fixed interest rate. is the interest earned on this sinking - fund taxable?
no, because sinking funds do not earn interest.
no, because the money is invested in government bonds with a variable interest rate.
yes, because the money is invested in government bonds with a fixed interest rate.
yes, because all sinking funds have fixed investments.

Explanation:

Sinking funds are set - aside money, often invested. Here, the money in the sinking fund is invested in government bonds with a fixed interest rate. So, interest will be earned.

Answer:

Yes, because the money is invested in government bonds with a fixed interest rate.