1. San San Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 9 percent coupon bonds on the market that sell for $930, make semiannual payments, and mature in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? (20 points)

2. The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY).

a) Suppose that today you buy a 7 percent annual coupon bond and the yield to maturity is 6.3%. The bond has 10 years to maturity. What is the price of the bond today? (5 point)

b) Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? What is the HPY on your investment? (15 points)

3. The Cairo Lumber Co. is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will pay 840 pounds per share per dividend in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price? (10 points)