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A finance company owns $50 million of floating-rate bonds yielding LIBOR plus 1%. These loans...

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Finance

A finance 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%. An insurance company has $50million of auto loans with a fixed rate of 14%. The loans are financed with $50million in CDs at a variable rate of LIBOR plus 4%

Which of the following is correct

I. The finance company is exposed to failing interest rates on the asset side of the balance sheet.

II. The FC wishes to convert the variable rate liabilities into fixed rate liabilities by swapping the variable rate payments for fixed rate payments

III. The FC make fixed rate payments and therefore is the buyer in the swap

a. I

b. II

c. I and II

d. I and III

e. I, II and III

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