1.An insurance company owns $50 million of floating-rate bonds yielding bank accepted bill rate (BBR) plus 1 per cent. These loans are financed by

$50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 per cent. A finance company has $50 million of car loans with a fixed rate of 14 per cent. The loans are financed by $50 million of CDs at a variable rate of BBR plus 4 per cent.

What is the risk exposure of the insurance company?

What is the risk exposure of the finance company?

What would be the cash flow goals of each company if they were to enter into a swap arrangement?

Which company would be the buyer and which company would be the seller in the swap?

Show by way of a diagram the direction of the relevant cash flows for the swap arrangement.

What are reasonable cash flow amounts, or relative interest rates, for each of the payment streams? LO 7.7