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?

The sinking fund’s money is invested in government bonds, and the question states those bonds pay a fixed interest rate. Therefore, the interest earned is fixed. The correct choice is “Yes, because the money is invested in government bonds with a fixed interest rate.”

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