The bonds of Copo Inc. are rated A+ and have 11 years until maturity. The bonds have a coupon rate of 4%, paid semi-annually. The bonds are rated A+.
Currently, the T-bill rate is 3%. The default risk premium associated with the Copo bonds is 50 bps, as is the liquidity premium. The maturity risk premium is 1%. The real risk-free rate is 2%.
What is the theoretical value of 1 of these bonds?
$1,000.00
$916.17
$605.11
$1,251.48
If the bond is selling in the secondary market for $912, is it overvalued or undervalued, and what action should you take?
overvalued; sell it
overvalued; buy it
undervalued; sell it
undervalued; buy it