The risk return theory states that the bond with the higher risk with yield the higher return. Annual coupon payments affect bond valuation in multiple ways when compared to non-annual payments. The interest rates determine if the bonds sell at a discount or a premium. The coupon rates of 4.5% and 8.25% are selling at a discount, the 12.63% is selling at a premium. The effective annual rate of return ends up being 10.25% compared to the nominal 10% after semiannual compounding has been taken into account. We expect the bond paying semiannually to sell at a lower price because they are paid at a faster rate than the annual payments. Sometimes referred to just as yield, yield to maturity is considered a long-term bond yield expressed as an annual rate. The calculation of yield to maturity takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Nominal yields for bonds A, B and C are 4.5%, 8.25%, and 7.45% respectively. We feel that yield to maturity gives the true overall yield to an investor. The overall rate of return can be affected by the length of time the bond is held. Nominal rate on this bond is 5.09% and effective annual YTM is 10.44%, current yield is 9.87 and 10.35% respectively. As a tax paying investor, the discount bond would be preferred because the taxes would be lower. Considering the riskiness of the bond, interest rate risk is risk of a decline in a bond’s price due to an increase in interest rates. While, reinvestment rate risk refers to risk that a decline in interest rates will mean a decrease in current bond rates. Therefore, when you go to reinvest money you will earn a lower rate. The longer the maturity, the more sensitive the bond is to changes in interest rates. Therefore, the longer the maturity of the bonds the