the second the rest of question 7-3.

7-1 A sinking fund can be set up in one of two ways: 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. The trustee uses the annual payments to retire a portion of the issue each year, call- ing a given percentage of the issue by a lottery and paying a specified price per bond or buying bonds on the open market, whichever is cheaper. What are the advantages and disadvantages of each procedure from the viewpoint of the firm and the bondholders? Can the following equation be used to find the value of a bond with N years to maturity that pays interest once a year? Assume that the bond was issued several years ago. N Annual interest Par value - (1 + r) (1 + r)" 7-2 7-3 The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is that statement true or false? Explain. (Hint: Make up a "reasonable" example based on a 1-year and a 20-year bond to help answer the question.)