A fixed-income trader at a hedge fund observes a three-year, 5% annual payment corporate bond trading at 104 per 100 of par value. The research team at the hedge fund determines that the risk-neutral annual probability of default used to calculate the conditional POD for each date for the bond, given a recovery rate of 40%, is 1.50%. The government bond yield curve is flat at 2.50%.

Based on these assumptions, does the trader deem the corporate bond to be overvalued or undervalued? By how much? If the trader buys the bond at 104, what are the projected annual rates of return?