I have been doing some mock questions, and I frequently encountered questions asking you to check if something is overvalued, correctly valued, or undervalued?
I recall a qusetion was asking if a bond is undervalued, correctly valued, or overvalued (can’t recall where I saw it) if the market price is $1,008. The market value of the bond, implied by the provided spot rates, turns out to be $1,010.05. So the correct answer is that the bond is currently undervalued.
However, I’ve also seen some solutions indicating that, if the calculated price is within 1%, it is considered closed, hence correctly priced.
Does anyone have any insight on how to determine if a security is correctly priced or can provide a rule of thumb?