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Question: An investor is planning to invest in the bond market and has the following choices: Bond A: This is a coupon bond. The bond has a face value of $1,000 and a coupon rate of 7% paid semi-annually. The bond matures in 5 years. Bond B: This is a zero-coupon bond. The bond has a face value of $1,000. Interest on this bond compounds semi- annually. The bond matures in 5 years. Bond C: This is a zero-coupon bond. The bond has a face value of $1,000. Interest on this bond compounds semi- annually. The bond matures in 10 years. The market rate of interest for all bonds is 4%. Considering the above information, please answer the following: (a) Determine the value of all three bonds. [6 marks] (b) State for each of the bonds if the bond sells at par or premium or discount. [3 marks) (C) Suppose Bond B and Bond C sell in the market for $700 and $440, respectively. Assuming yield to maturity from the respective bonds is the only decision criterion, which of these zero-coupon bonds is preferable for purchase? Show relevant calculations. [3.5 marks] (d) Consider the bond theorems, as well as the relation between bond price and interest rate. Which of these three bonds will suit a risk-averse investor and which will suit an investor willing to take risks? Explain. [4.5 marks]

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