sinking fund can be set up in one of two ways:

(1) The corporation makes annual payments to the trustee, who invests the proceeds

in securities (frequently government bonds) and uses the accumulated

total to retire the bond issue at maturity.

(2) The trustee uses the annual payments to retire a portion of the issue each

year, either by calling a given percentage of the issue through a lottery andpaying a specified price per bond or by buying bonds on the open market, whichever is cheaper. Discuss the advantages and disadvantages of each procedure from the viewpoint of both the firm and its bondholders.

The answer should be at least 200 words!