A fixed-income trader at a hedge fund observes a 3-year, 10% corporate coupon bond, payable semi-annually, trading at $106 per $100 of par value. The research team at the hedge fund determines that the risk-neutral probability of default used to calculate the conditional POD for each date for the bond is 1.25% given a recovery rate of 35%. The government bond yield curve is flat at 6%.

Based on these assumptions, does the trader deem the corporate bond to be overvalued or undervalued? By how much? what will be the credit valuation adjustment? If the trader buys the bond at $106, what are the projected rates of return?