An investor is planning to invest in the bond market and has the following choices:

Bond A:

This is a coupon bond from AB Ltd. The bond has a face value of $1000 and a coupon rate of 6.25% paid semi-annually. The bond matures in 10 years.

Bond B:

This is a zero-coupon bond from AB Ltd. The bond has a face value of $1000. Interest on this bond is compounded semi-annually. The bond matures in 10 years.

Bond C:

This is another class of zero-coupon bond from AB Ltd. The bond has a face value of $1000. Interest on this bond is compounded annually. The bond matures in 10 years.

The market rate of interest for all bonds is 4.25%.

Considering the above information, please answer the following:

Determine the value of all bonds. 

Do the bonds sell at par or premium or discount? 

Suppose the investor buys one unit of Bond B and one unit of Bond C at the respective prices (i.e., values) determined in (a), and then sells both bonds for $850 after 5 years. Determine the realized yield for the investor for each of the bonds.

AB Ltd. wishes to raise:

$1m by selling a new issue of bonds with identical face value, maturity, market interest rate, and interest compounding as for Bond A.

$1.5m by selling a new issue of bonds with identical face value, maturity, market interest rate, and interest compounding as for Bond B.

$2.5m by selling a new issue of bonds with identical face value, maturity, market interest rate, and interest compounding as for Bond C.

Determine the number of new bonds for each issue that needs to be sold to raise the stated respective capital. 

If the interest rate is likely to change (rise or fall) in the future, which of the bonds between Bond A, Bond B, and Bond C will suit a risk-averse investor and for what changes in the interest rate? Explain.