Chapter 10

Section 10.1
1. Increases
2. Long-term bond
3. Macaulay duration is the weighted average time of future cash flows.
4. For a 100-basis point change in the yield rate, the price of the bond will
decrease/increase by 2.5%
𝑀𝑎𝑐𝐷
5. MacD and ModD are related through the equation 𝑀𝑜𝑑𝐷 = 1+𝑖 , where modified
duration takes into account price sensitivity when there is a change in the yield to
maturity.
6. 2.66
7. 2.86
8. 0.3%; 30 basis points
9. 2.80%
10. $5,105
11. 1.6%
12. a. $40 b. $1,094.27 c. $1,099.27 d. $1,089.30 e. 4.56%
13. a. $25 b. $1,000 c. $1,002.76 d. $997.25 e. 2.76% f. 2.82 g. 2.69%
14. a. $7.50 b. $500 c. $500.96 d. $499.04 e. 1.92% f. 1.96 g. 1.90%
15. a. 3-year bond: 2.79; 5-year bond: 4.39 b. 3-year bond: 4.14%; 5-year bond: 2.63% c.
3.39%
16. a. 5-year bond: 4.65; 10-year bond: 3.40 b. 5-year bond:4.58%; 10-year bond: 3.33% c.
3.96%

Section 10.2
1. More curved
2. Macaulay duration approximates a price-yield relationship linearly; Macaulay convexity
does the same thing, but it accounts for the curvature of the price-yield relationship.
3. Macaulay convexity
4. The modified convexity is a measure of the curvature of the price-yield curve.
5. Years; squared years; percent-squared
6. $987.75
7. $994.62
8. 29.58 percent-squared
9. 3.97 squared half-years
10. 0.993 squared years
11. a. 4.72 years b. 4.58% c. 23.03 squared years d. 26.15 percent-squared
12. a. 4.65 years b. 4.58% c. 22.58 squared years d. 26.43 percent squared
13. a. 2.86 years b. 2.75% c. 8.41 squared years d. 10.40 percent squared
14. a. 3.75 years b. 3.69% c. 14.63 squared years d. 17.84 percent squared
15. a. 2.40 years b. 2.31% c. 6.12 squared years d. 7.87 percent squared
Section 10.3
1. If there are interest rate changes in longer or shorter term bonds, you could maximize
your investment and make money after the liability has been paid.
2. The portfolio is protected against changes in the interest rate.
3. Down; up
4. The present value of the assets and liabilities must be equal, and the Macaulay
durations of the assets and liabilities must be equal. Also, the Macaulay convexity of
assets must be greater than the Macaulay convexity of liabilities.
5. There needs to be a cash flow before and after the liability
6. 257.6 two-year bonds; 161.6 five-year bonds
7. 3.125 years
8. 11.875 squared years
9. $266,666.67 in the two-year bonds; $133,333.33 in the five-year bonds
10. a. 140.05 bonds b. $135,804.39
11. a. $452,865.40 b. 5 years c. $323,475.29 in the three-year bond; $129,390.11 in the ten-
year bond d. 25 e. 35 f. Yes; yes
12. a. $29,124.37 b. 1.66 years c. $22,716.57 in 1 year bonds; $6,407.80 in four-year bonds
d. 2.98 squared years e. 4.30 squared years f. Yes; yes.
13. a. $67,413.85 b. 1.71 years c. $43,519.84 in in 1 year bonds; $23,912.01 in three-year
bonds d. 3.13 squared years e. 3.84 squared years f. Yes; yes

End of chapter
1. D
2. C
3. B
4. D
5. C
6. A
7. C
8. B
9. D
10. A
11. D
12. B
13. C
14. B
15. A
16. D
17. A
18. D
19. A
20. E
21. A