(10%) Your friend has found an Illinois Power Company bond currently trading in the market at $800 with a par value of $1,000. The 15-year bond was issued 5 years ago with a coupon rate of 9%. The yield-to-maturity on bonds with similar risk profiles to Illinois Power Company are currently yielding 12%. Your friend has calculated that the bond is currently paying a yield of 11.25% plus, they will get the $200 of capital appreciation of the bond when it matures. Your friend is excited about this opportunity. They believe the bond is materially mispriced.

1. What do you advise your friend? Have they found a materially mispriced bond?