The correct answers are: A company borrows at a fixed rate of interest; A company holds a quantity of government bonds as a short-term investment; A company borrows at a variable rate of interest.

Interest rate risk occurs whenever a company borrows, at either a fixed or a variable rate of interest. When a company borrows at a fixed rate, the risk is that market interest rates will fall, leaving the company paying higher interest than it would have done if it had borrowed at a variable rate. Government bonds rise or fall in value with changes in long-term interest rates, which means that bond investors are exposed to interest rate risk.