Section 5.

2
1. Dollar-weighted yield rate will be larger.
2. Time-weighted rate of return.
3. Since you are attempting to maximize your rate of return, you should compare each
other’s dollar-weighted rate of return because it shows whether or not the investor timed
his/her deposits well.
4. No.
5. It will be the same.
6. a. $1,030 b. 1,091.80 c. 9.18%
7. 4.49%
8. 5.30%
9. 4100 = 3000(1 + 𝑖) + 1000(1 + 𝑖)0.25
10. 5000 = 2000(1 + 𝑖) + 1000(1 + 𝑖)0.5 + 1500(1 + 𝑖)0.25
11. a. $3,151.20 b. 3151.2 = 1000(1 + 𝑖)2 + 2000(1 + 𝑖) c. 3.745%
12. a. $2,727 b. 2727 = 1000(1 + 𝑖)2 + 2000(1 + 𝑖) c. -6.946%
13. a. 2.77% b. 5.62% c. No. d. Yes, i = 2.43%
14. a. 10.33% b. 21.73% c. 20.40% d. 19.62%
15. a. 12.5% b. 4% c. 17% d. 5460 = 2000(1 + 𝑖) + 3000(1 + 𝑖)0.5 e. 13.32%
f. i. Yes, the dollar-weighted rate considers deposits/withdrawals. In this case, the larger
deposit was made at the correct time when the rate of return was high.
ii. No, the time-based rate of return does not account for the mount of
deposits/withdrawals.
Section 5.2
1. More sensitive
2. Increases present value
3. Weighted average; future investment payments
4. Bond B
5. Decrease to $484.51 (a decrease of $15.49)
6. Decrease to $476.79 (a decrease of $23.21)
7.
Payment date Payment Present % of total cash flow Product of time and
(from now) size Value (weighting factor) weighting factor

0.5 years 12 $11.65 0.02913 0.01456

1 year 12 $11.31 0.02828 0.02828
1.5 years 12 $10.98 0.02745 0.04118
2 years 12 $10.66 0.02665 0.05331
2 years 400 $355.39 0.8885 1.7770
Total $400 100% 1.9143

8.
Payment date Payment Present % of total cash flow Product of time and
(from now) size Value (weighting factor) weighting factor
 0.5 years 16 $15.69 0.01961 0.009804
1 year 16 $15.38 0.01922 0.01922
1.5 years 16 $15.08 0.01885 0.02827
2 years 16 $14.78 0.01848 0.03695
2 years 800 $739.08 0.92385 1.8477
Total $800 100% 1.9419
9. 1.86 years
10. 2.73 years
11. 2.70 years
12. The price changes $87.47 for an 8 percentage point change in yield rate, or
$10.93/point. For a bond that is $600 currently this amounts to a $10.93/$600=0.01822
or 1.822% change in price per 1-percentage point change in yield.
13. The price changes $37.19 for a 4 percentage point change in yield rate, or $9.30/point.
For a bond that is $500 currently this amounts to a $9.30/$500=0.0186 or 1.86% change
in price per 1-percentage point change in yield.

Section 5.3
1. Assets and liabilities
2. Interest rate risk
3. Buy some short-term bonds – bonds that expire before the due date of the liability – and
some long-term bonds – bonds that expire after the due date of the liability.
4. A decrease in the yield rate will hurt the short-term bond, but it will increase the value of
the long-term bond, and vice versa.
5. The due date of the liability
6. More. A lower interest rate means you can sell your bond for more than if the interest
rate remained constant.
7. a. $970.87 b. $980.39
8. a. $951.81 b. $924.56
9. $942.60
10. 3.06%
11. a. $450.77 b. 166
12. a. $35,555 b. $40,017.48
13. a. $40,007.84 b. $40,030.77
14. a. $39,016.7 b. $47,469.89
15. a. $48,669.67 b. $46,388.58
16. a. Bond A: $613.91; Bond B: $783.53 b. Bond A: $837.48; Bond B: $970.87 c. Bond
A: 8.07%; Bond B: 5.51%
17. a. Bond A: $613.91; Bond B: $783.53 b. Bond A: $666.34; Bond B: $934.58 c. Bond
A: 2.07%; Bond B: 4.51%

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