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 fixed?
no, because the money is invested in government bonds with a variable interest rate.
yes, because all sinking funds have fixed investments.
yes, because the money is invested in government bonds with a fixed interest rate.
no, because sinking funds do not earn interest.

Explanation:

The question states the sinking fund is invested in government bonds with a fixed interest rate. We evaluate each option against this fact:

1. The first option claims variable rates, which contradicts the given fixed rate.
2. The second option's reasoning is incorrect; not all sinking funds have fixed investments, only this specific one does.
3. The third option aligns with the given information: the fund earns fixed interest because it's invested in fixed-rate government bonds.
4. The fourth option is wrong, as sinking funds do earn interest when invested.

Answer:

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