Cisco 2008 Annual Report Download - page 63

68 Cisco Systems, Inc.
Notes to Consolidated Financial Statements
(b) Interest Rate Derivatives
The Company’s interest rate derivatives are summarized as follows (in millions):
July 26, 2008 July 28, 2007
Notional
Amount Fair Value
Notional
Amount Fair Value
Interest rate swaps—investments $ 1,000 $ (4) $ 1,000 $ 29
Interest rate swaps—long-term debt $ — $ — $ 6,000 $ (81)
The Company’s primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with
preserving principal and managing risk. To realize these objectives, the Company may utilize interest rate swaps or other derivatives
designated as fair value or cash flow hedges.
Interest Rate Swaps, Investments The Company is currently a party to $1.0 billion of interest rate swaps designated as fair value hedges of
its investment portfolio. Under these interest rate swap contracts, the Company makes fixed-rate interest payments and receives interest
payments based on LIBOR. The effect of these swaps is to convert fixed-rate returns to floating-rate returns based on LIBOR for a portion
of the Company’s fixed income portfolio. The gains and losses related to changes in the value of the interest rate swaps are included in
other income (loss), net, and offset the changes in fair value of the underlying hedged investment. The fair values of the interest rate swaps
designated as hedges of the Company’s investments are reflected in prepaid expenses and other current assets or other current liabilities.
Interest Rate Swaps, Long-Term Debt In conjunction with its issuance of fixed-rate senior notes in February 2006, the Company entered into
$6.0 billion of interest rate swaps designated as fair value hedges of the fixed-rate debt. The effect of these swaps was to convert fixed-rate
interest expense to floating-rate interest expense based on LIBOR. During fiscal 2008, the Company terminated the $6.0 billion of interest
rate swaps and received proceeds of $432 million, net of accrued interest, which was recorded as a hedge accounting adjustment of the
carrying amount of the fixed-rate debt and is amortized as a reduction to interest expense over the remaining terms of the fixed-rate notes.
While such interest rate swaps were in effect, their fair values were reflected in other assets or other long-term liabilities and the gains and
losses related to changes in the value of such interest rate swaps were included in other income (loss), net, and offset the changes in fair
value of the underlying debt.
(c) Equity Derivatives
The Company’s equity derivatives are summarized as follows (in millions):
July 26, 2008 July 28, 2007
Notional
Amount Fair Value
Notional
Amount Fair Value
Forward sale agreements $ 157 $ 32 $ 458 $ 1
The Company maintains a portfolio of publicly traded equity securities which are subject to price risk. The Company may hold equity
securities for strategic purposes or to diversify the Company’s overall investment portfolio. To manage its exposure to changes in the fair
value of certain equity securities, the Company may enter into equity derivatives, including forward sale and option agreements. As of
July 26, 2008, the Company had entered into forward sale agreements on certain publicly traded equity securities designated as fair value
hedges. The gains and losses due to changes in the value of the hedging instruments are included in other income (loss), net, and offset
the change in the fair value of the underlying hedged investment. The fair values of the equity derivatives are reflected in prepaid expenses
and other current assets and other current liabilities.