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

What is the interest rate risk exposure of each company?

Group of answer choices

1. The insurance company is worried about a decline in rates while the finance company is worried about an increase in rates
2. The insurance company is worried about a rise in rates while the finance company is worried about a decline in rates
3. Both the insurance company and the finance company are worried about an increase in rates
4. Both the insurance company and the finance company are worried about a decline in rates

If the two companies entered into an interest rate swap, what would be their desired positions in the swap--would they want to pay floating/receive fixed or pay fixed/receive floating?

Group of answer choices

1. The insurance company would want to pay fixed/receive float and the finance company would want to pay float/receive fixed
2. Both companies would want to pay float/receive fixed
3. Both companies would want to pay fixed/receive float
4. The insurance company would want to pay float/receive fixed and the finance company would want to pay fixed/receive float