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An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1%. These loans are financed with $50 million of fixed-rate guaranteed investment contracts

An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1%. These loans are financed with $50 million of fixed-rate guaranteed investment contracts (GICs) costing 10%. A bank has $50 million of auto loans with a fixed rate of 14%. The loans are financed with $50 million in CDs at a variable rate of LIBOR plus 4%.

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

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

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