notes to consolidated financial statements Note 27 Financial Instruments 2006 2005 Assets (liabilities) Assets (liabilities) Notional Carrying Estimated Notional Carrying Estimated December 31 (In millions) amount amount (net) fair value amount amount (net) fair value GE Assets Investments and notes receivable $ (a) $ 494 $ 494 $ (a) $ 573 $ 625 Liabilities Borrowings(b)(c) (a) (11,297) (11,204) (a) (10,208) (10,223) GECS Assets Loans (a) 266,055 265,578 (a) 223,855 224,259 Other commercial and residential mortgages held for sale (a) 7,296 7,439 (a) 6,696 6,696 Other fi nancial instruments (d) (a) 3,714 4,158 (a) 4,138 4,494 Liabilities Borrowings (b) (c) (a) (426,279) (432,275) (a) (362,069) (369,972) Investment contract benefits (a) (5,089) (5,080) (a) (6,034) (6,020) Insurance — credit life (e) 2,634 (81) (61) 2,365 (8) (8) (a) These financial instruments do not have notional amounts. (b) Included effects of interest rate and cross-currency swaps. (c) See note 18. (d) Principally cost method investments. (e) Net of reinsurance of $840 million and $292 million at December 31, 2006 and 2005, respectively. Assets and liabilities not carried at fair value in our Statement of Financial Position are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instru- ments discussed below are actively traded and their fair values must often be determined using financial models. Realization of the fair value of these instruments depends upon market forces beyond our control, including marketplace liquidity. Therefore, the disclosed fair values may not be indicative of net realizable value or reflect future fair values. A description of how we estimate fair values follows. Loans Based on quoted market prices, recent transactions and/or dis- counted future cash flows, using rates at which similar loans would have been made to similar borrowers. Borrowings Based on discounted future cash flows using current market rates which are comparable to market quotes. Investment contract benefits Based on expected future cash flows, discounted at currently offered rates for immediate annuity contracts or cash surrender values for single premium deferred annuities. All other instruments Based on comparable market transactions, discounted future cash flows, quoted market prices, and/or estimates of the cost to terminate or otherwise settle obligations. The fair values of our cost method investments that are not exchange traded rep- resent our best estimates of amounts we could have received other than on a forced or liquidation basis. Assets and liabilities that are reflected in the accompanying financial statements at fair value are not included in the above disclosures such items include cash and equivalents, investment securities and derivative fi nancial instruments. Additional information about certain categories in the table above follows. Residential mortgages Residential mortgage products amounting to $13,325 million (23% of all residential mortgages) and $12,633 million (27% of all residential mortgages) at December 31, 2006 and 2005, respectively, were either high loan-to-value, those permitting interest-only payments or those with below market introductory rates. We orig- inate such loans either for our portfolio or for sale in secondary markets. The portfolio was geographically diverse, with Europe and North America the most significant market segments. ge 2006 annual report 101

notes to consolidated financial statements Insurance — credit life Certain insurance affiliates, primarily in GE Money, issue credit life insurance designed to pay the balance due on a loan if the borrower dies before the loan is repaid. As part of our overall risk management process, we cede to third parties a portion of this associated risk, but are not relieved of our primary obligation to policyholders. LOAN COMMITMENTS Notional amount December 31 (In millions) 2006 2005 Ordinary course of business lending commitments(a) Fixed rate $ 3,186 $ 4,188 Variable rate 9,515 6,068 Unused revolving credit lines(b) Commercial Fixed rate 868 779 Variable rate 24,095 20,779 Consumer — principally credit cards Fixed rate 136,920 170,367 Variable rate 341,656 281,113 (a) Excluded investment commitments of $2,881 million and $1,418 million as of December 31, 2006 and 2005, respectively. (b) Excluded inventory financing arrangements, which may be withdrawn at our option, of $11,044 million and $11,383 million as of December 31, 2006 and 2005, respectively. Derivatives and hedging We conduct our business activities in diverse markets around the world, including countries where obtaining local funding is sometimes inefficient. The nature of our activities exposes us to changes in interest rates and currency exchange rates. We manage such risks using straightforward techniques including debt whose terms correspond to terms of the funded assets, as well as combinations of debt and derivatives that achieve our objectives. We also are exposed to various commodity price risks and address certain of these risks with commodity contracts. We value deriv- atives that are not exchange-traded with internal market-based valuation models. When necessary, we also obtain information from our derivative counterparties to validate our models and to value the few products that our internal models do not address. We use interest rate swaps, currency derivatives and com- modity derivatives to reduce the variability of expected future cash flows associated with variable rate borrowings and com- mercial purchase and sale transactions, including commodities. We use interest rate swaps, currency swaps and interest rate and currency forwards to hedge the fair value effects of interest rate and currency exchange rate changes on local and non- functional currency denominated fi xed-rate borrowings and certain types of fixed-rate assets. We use currency swaps and forwards to protect our net investments in global operations conducted in non-U.S. dollar currencies. We intend all of these positions to qualify as hedges and to be accounted for as hedges. We use swaps, futures and option contracts, including caps, floors and collars, as economic hedges of changes in interest rates, currency exchange rates and equity prices on certain types of assets and liabilities. We sometimes use credit default swaps to hedge the credit risk of various counterparties with which we have entered into loan or leasing arrangements. We occasionally obtain equity warrants as part of sourcing or fi nancing transactions. Although these instruments are derivatives, their economic risks are similar to, and managed on the same basis as, risks of other equity instruments we hold. These instruments are marked to market through earnings. Earnings effects of derivatives designated as hedges At December 31, 2006, approximately 57% of our total interest rate swaps accounted for as hedges were exempt from ongoing tests of effectiveness. The following table provides information about the earnings effects of derivatives designated and qualifying as hedges, but not qualifying for the assumption of no ineffec- tiveness. PRE-TAX GAINS (LOSSES) December 31 (In millions) 2006 2005 2004 CASH FLOW HEDGES Ineffectiveness $10 $(27) $20 Amounts excluded from the measure of effectiveness (16) 17 25 FAIR VALUE HEDGES Ineffectiveness (47) 4 11 Amounts excluded from the measure of effectiveness 33 (8) 3 In 2006 and 2005, we recognized insignificant gains and losses related to hedged forecasted transactions and fi rm commitments that did not occur by the end of the originally specifi ed period. In 2004, we recognized a pre-tax loss of $46 million, before cancellation penalties, for terminating a forward euro contract when our customer cancelled its hedged, firm order for equipment and services. Additional information regarding the use of derivatives is provided in note 18 and note 23. 102 ge 2006 annual report