An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are

Question:

An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed with $50 million of fixed-rate guaranteed invest- ment contracts (GICs) costing 10 percent. A finance com- pany has $50 million of auto loans with a fixed rate of 14 percent. The loans are financed with $50 million in CDs at a variable rate of LIBOR plus 4 percent. (LG 10-7)

a. What is the risk exposure of the insurance company?

b. What is the risk exposure of the finance company?

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

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

e. Diagram the direction of the relevant cash flows for the swap arrangement.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Financial Markets And Institutions

ISBN: 9780078034664

5th Edition

Authors: Anthony Saunders, Marcia Cornett

Question Posted: