Q Assuming Bond A is correctly priced and given the information in Exhibit 1, is Krishnan most likely correct that there is a mispricing?
- Yes, Bond C must be mispriced.
- Yes, Bond B must be mispriced.
- No, there is no evidence of a mispricing
anyone please explain why the bond B is mispriced
All bonds have the same coupon rate and credit rating and approximately the same remaining
maturity. The pricing of all three (below par), implies the coupon rate of a par bond with this credit rating and approximate maturity is higher than 7.0%. Bond A is not callable, while Bond B is
callable and has a slightly longer maturity than Bond A. Both of these differences imply Bond B’s
price should be lower than Bond A’s, but it is higher.