Problem
An investor is planning to invest in the bond market and has the following choices:
Bond I:
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 II:
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 III:
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%.
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?