To protect investors from mispricing risk when quoting yields, a firm should:

• A. Ensure quotes reflect current market conditions and are not artificially inflated or deflated.
• B. Quote high yields to attract buyers.
• C. Publish yields without context.
• D. Only quote yields to large institutions.

Answer: (A)

When quoting yields, it’s essential that the numbers reflect current market conditions so investors aren’t misled about value. If a firm inflates or deflates a yield, it distorts price signals and can cause investors to pay too much or accept too little, creating mispricing risk. The best practice is to provide yields that accurately mirror prevailing market rates and conditions, often with clear notes about features like maturity, call provisions, or credit quality. Publishing yields without context or restricting quotes to only large institutions would hide important information and unfairly limit access, which undermines fair pricing.