Capital One 2007 Annual Report Download - page 129

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107
Note 27
Disclosures About Fair Value of Financial Instruments
The following discloses the fair value of financial instruments whether or not recognized in the balance sheets as of December 31,
2007 and 2006. In cases where quoted market prices are not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the instrument. As required under GAAP, these disclosures exclude
certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The Company, in estimating the fair value of its financial instruments as of December 31, 2007 and 2006, used the following methods
and assumptions:
Financial Assets
Cash and cash equivalents
The carrying amounts of cash and due from banks, federal funds sold and resale agreements and interest-bearing deposits at other
banks approximate fair value.
Securities available for sale
The fair value of securities available for sale was determined using current market prices. See Note 1.
Mortgage loans held for sale
The carrying amount approximates fair value as mortgage loans held for sale are carried at the lower of aggregate cost (net of deferred
fees, deferred origination costs and effects of hedge accounting) or fair value. The fair value of mortgage loans held for sale is
determined using current secondary market prices for loans with similar coupons, maturities and credit quality.
Loans held for investment
The net carrying amount of credit card loans approximates fair value due to the relatively short average life and variable interest rates
on a substantial number of these loans. This amount excluded any value related to account relationships.
The fair value of installment loans, auto loans, mortgage loans and commercial loans was estimated by discounting future cash flows
using a rate at which similar portfolios of loans would be made under current conditions.
Interest receivable
The carrying amount approximates the fair value of this asset due to its relatively short-term nature.
Accounts receivable from securitizations
The carrying amount approximates fair value as certain accounts receivables, such as the interest-only strips, retained subordinated
notes, and cash reserve and spread accounts are adjusted to fair value. The fair value is estimated by discounting future cash flows
using certain key assumptions described further in Note 24. Other accounts receivable from securitizations are carried at cost, which
approximates fair value.
Derivatives
The carrying amount of derivatives approximates fair value and was estimated using present value valuation techniques. This value
generally reflects the estimated amounts that the Company would have received to terminate the interest rate swaps, currency swaps
and forward foreign currency exchange (f/x) contracts at the respective dates, taking into account the forward yield curve on the
swaps and the forward rates on the currency swaps and f/x contracts. These derivatives are included in other assets on the balance
sheet.
Mortgage Servicing Rights
Mortgage servicing rights are carried at fair value. Fair value is determined using the present value of future cash flows of net
servicing income, which are estimated under certain assumptions described further in Note 1.